Deferring First RMD

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northstar22
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Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 9:14 am

I'm looking for advice regarding my mom's first RMD (I manage her retirement accounts). She is divorced, will turn 70 1/2 next year, and is still working full time (and plans to for about 5 years). Marginal tax rate of 25%. She will begin collecting her SS next year at age 70. Her goal is to avoid RMD's until she retires. Most of her money is in her employer 401k and Roth (safe from RMDs). About $30k is in an IRA, which she will rollover into her employer 401k before the end of this year, no big deal. Three fund portfolio.

The question is regarding $55k she has in a tax qualified fixed-indexed annuity. The annuity is terrible and it was sold to her shortly before I started managing her retirement accounts. It has a surrender penalty for 10 years that drops 1% a year, so we are now at about 4.5% (her penalty for liquidating today would be $2400). For the past 5 years I've just been treating it as a bond in her portfolio as we wait for the surrender penalty to drop; she has no intention of annuitizing it. It allows a 10% yearly free withdrawal so she's been doing that each year and rolling it over into her IRA.

I see 2 options at this point:

1) Pay the surrender penalty of $2400 now and rollover into her 401k before the end of the year to avoid any RMDs on the $55k. Also be done with the terrible annuity.

2) Continue waiting for the surrender penalty to expire in 4.5 years, taking free annual 10% withdrawal (rolling over to IRA) and have to take RMD for 5 years (2018-2022) until she can liquidate penalty-free. For 2018 estimated RMD would be $2000.

Thanks for any advice.

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oldcomputerguy
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Re: Deferring First RMD

Post by oldcomputerguy » Sat Dec 09, 2017 9:24 am

I’m not entirely clear on your proposed game plan. The way I read it, you seem to be wanting to protect the $55k from RMDs by rolling it into the 401k. But 401k’s are subject to RMDs when the holder turns RMD age. So i’m not sure what you expect to gain.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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FiveK
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Re: Deferring First RMD

Post by FiveK » Sat Dec 09, 2017 9:42 am

oldcomputerguy wrote:
Sat Dec 09, 2017 9:24 am
I’m not entirely clear on your proposed game plan. The way I read it, you seem to be wanting to protect the $55k from RMDs by rolling it into the 401k. But 401k’s are subject to RMDs when the holder turns RMD age. So i’m not sure what you expect to gain.
+1

See Retirement Plans FAQs regarding Required Minimum Distributions | Internal Revenue Service to confirm that a 401k is subject to RMDs:
The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

northstar22
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Re: Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 9:45 am

There's a still working exception. She still works full time.

https://www.kitces.com/blog/minimize-de ... ligations/

neilpilot
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Re: Deferring First RMD

Post by neilpilot » Sat Dec 09, 2017 9:47 am

oldcomputerguy wrote:
Sat Dec 09, 2017 9:24 am
I’m not entirely clear on your proposed game plan. The way I read it, you seem to be wanting to protect the $55k from RMDs by rolling it into the 401k. But 401k’s are subject to RMDs when the holder turns RMD age. So i’m not sure what you expect to gain.
I'm also unclear about what the question is, since the title implies avoiding RMD but the question is how to exit a bad annuity. I do have to observations, without answering the question:

[1] I believe that someone who continues to work beyond 70.5 is exempt from RMDs out of a 401k with their current employer.
[2] If the annuity is really that bad, would a release from the fees offset a portion of that surrender penalty. Also, one option to reduce onerous annuity fees is to drop possibly unneeded riders with their associated fees, including but not limited to insurance or inflation riders.

Chip
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Re: Deferring First RMD

Post by Chip » Sat Dec 09, 2017 9:54 am

From the horse's mouth:
IRS Pub 575 wrote:Required beginning date.

Unless the rule for 5% owners applies, you generally must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of:

The calendar year in which you reach age 70½, or

The calendar year in which you retire from employment with the employer maintaining the plan.

However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 70½, even if you haven’t retired.

northstar22
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Re: Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 9:54 am

neilpilot wrote:
Sat Dec 09, 2017 9:47 am
oldcomputerguy wrote:
Sat Dec 09, 2017 9:24 am
I’m not entirely clear on your proposed game plan. The way I read it, you seem to be wanting to protect the $55k from RMDs by rolling it into the 401k. But 401k’s are subject to RMDs when the holder turns RMD age. So i’m not sure what you expect to gain.
I'm also unclear about what the question is, since the title implies avoiding RMD but the question is how to exit a bad annuity. I do have to observations, without answering the question:

[1] I believe that someone who continues to work beyond 70.5 is exempt from RMDs out of a 401k with their current employer.
[2] If the annuity is really that bad, would a release from the fees offset a portion of that surrender penalty. Also, one option to reduce onerous annuity fees is to drop possibly unneeded riders with their associated fees, including but not limited to insurance or inflation riders.
The question is which of the two options is preferred.

It's a good point about the annuity fees. I cancelled all riders years ago when I started managing her accounts.

Silk McCue
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Re: Deferring First RMD

Post by Silk McCue » Sat Dec 09, 2017 10:03 am

Never having to think again about a “terrible annuity” given these specifics - priceless. I speak from relieved personal experience.

jimmieg
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Re: Deferring First RMD

Post by jimmieg » Sat Dec 09, 2017 10:42 am

As I understand the deferring of the 1st RMD under the "still working for sponsoring employer" clause, it does not have to be "full-time." It may be part-time work as long as there is some W-2 income, and the employment continues through 12/31 of a given year.

Does anyone know differently?

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FiveK
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Re: Deferring First RMD

Post by FiveK » Sat Dec 09, 2017 10:48 am

northstar22 wrote:
Sat Dec 09, 2017 9:45 am
There's a still working exception. She still works full time.
Ah, yes.

In that case, what is the expected difference in marginal rate for the next 4-5 years vs. after that? In other words, while she is working one might expect her marginal rate to be higher than when she is retired. If she will be paying 15% marginal in retirement instead of 25% (may or may not be true), that would be an extra 10% * 2000 * 5 = $1000 taxes paid if she takes RMDs for 5 years. Avoiding that would ease the sting of the $2400 surrender fee.

northstar22
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Re: Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 11:03 am

FiveK wrote:
Sat Dec 09, 2017 10:48 am
northstar22 wrote:
Sat Dec 09, 2017 9:45 am
There's a still working exception. She still works full time.
Ah, yes.

In that case, what is the expected difference in marginal rate for the next 4-5 years vs. after that? In other words, while she is working one might expect her marginal rate to be higher than when she is retired. If she will be paying 15% marginal in retirement instead of 25% (may or may not be true), that would be an extra 10% * 2000 * 5 = $1000 taxes paid if she takes RMDs for 5 years. Avoiding that would ease the sting of the $2400 surrender fee.
Yes, I should have specified that expected marginal rate in retirement is 15%.

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FiveK
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Re: Deferring First RMD

Post by FiveK » Sat Dec 09, 2017 11:04 am

jimmieg wrote:
Sat Dec 09, 2017 10:42 am
As I understand the deferring of the 1st RMD under the "still working for sponsoring employer" clause, it does not have to be "full-time." It may be part-time work as long as there is some W-2 income, and the employment continues through 12/31 of a given year.
That looks correct.

The 26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans | US Law | LII / Legal Information Institute language:
The term “required beginning date” means April 1 of the calendar year following the later of—
(I) the calendar year in which the employee attains age 70½, or
(II) the calendar year in which the employee retires.

Alan S.
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Re: Deferring First RMD

Post by Alan S. » Sat Dec 09, 2017 1:42 pm

You described the annuity as "tax qualified", which generally means that it was purchased by an employer for the employee. However, it sounds like this may be a NQ annuity instead. The 1099 R will usually not be definitive. If it is non qualified (purchased by her using her own money), distributions are not eligible for rollover to an IRA and normal RMD requirements of Sec 401(a)(9) do not apply. Tax deferred has a different meaning than "tax qualified". Improper rollover to an IRA would create an excess IRA contribution as well as being taxable. Hopefully, this is not NQ.

Best to get this question resolved before rolling the IRA that has been receiving these rollovers into the 401k. That would create a real mess.

northstar22
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Re: Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 1:49 pm

Alan S. wrote:
Sat Dec 09, 2017 1:42 pm
You described the annuity as "tax qualified", which generally means that it was purchased by an employer for the employee. However, it sounds like this may be a NQ annuity instead. The 1099 R will usually not be definitive. If it is non qualified (purchased by her using her own money), distributions are not eligible for rollover to an IRA and normal RMD requirements of Sec 401(a)(9) do not apply. Tax deferred has a different meaning than "tax qualified". Improper rollover to an IRA would create an excess IRA contribution as well as being taxable. Hopefully, this is not NQ.

Best to get this question resolved before rolling the IRA that has been receiving these rollovers into the 401k. That would create a real mess.
It was purchased (with the "help" of a former financial advisor) by transferring money from her 401k over 5 years ago. The annuity says "IRA" under tax qualification.

itstoomuch
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Re: Deferring First RMD

Post by itstoomuch » Sat Dec 09, 2017 2:00 pm

So,
What is the Guaranteed Income Acct growth rate?
Compound or Simple?
What is the Guaranteed initial Income Acct withdrawal rate?
Is the Initial withdrawal rate based on age and holding period?
What was the purpose of the deferred annuity? Not your purposes but Moms'?
YMomsMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

Alan S.
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Re: Deferring First RMD

Post by Alan S. » Sat Dec 09, 2017 3:45 pm

northstar22 wrote:
Sat Dec 09, 2017 1:49 pm
Alan S. wrote:
Sat Dec 09, 2017 1:42 pm
You described the annuity as "tax qualified", which generally means that it was purchased by an employer for the employee. However, it sounds like this may be a NQ annuity instead. The 1099 R will usually not be definitive. If it is non qualified (purchased by her using her own money), distributions are not eligible for rollover to an IRA and normal RMD requirements of Sec 401(a)(9) do not apply. Tax deferred has a different meaning than "tax qualified". Improper rollover to an IRA would create an excess IRA contribution as well as being taxable. Hopefully, this is not NQ.

Best to get this question resolved before rolling the IRA that has been receiving these rollovers into the 401k. That would create a real mess.
It was purchased (with the "help" of a former financial advisor) by transferring money from her 401k over 5 years ago. The annuity says "IRA" under tax qualification.
OK, the rollovers are fine then, but best they be done by a direct non reportable transfer if possible since there is only one allowed 60 day rollover in a 12 month rolling period of time.

northstar22
Posts: 69
Joined: Mon Jul 16, 2012 8:30 pm

Re: Deferring First RMD

Post by northstar22 » Sat Dec 09, 2017 5:14 pm

Alan S. wrote:
Sat Dec 09, 2017 3:45 pm
northstar22 wrote:
Sat Dec 09, 2017 1:49 pm
Alan S. wrote:
Sat Dec 09, 2017 1:42 pm
You described the annuity as "tax qualified", which generally means that it was purchased by an employer for the employee. However, it sounds like this may be a NQ annuity instead. The 1099 R will usually not be definitive. If it is non qualified (purchased by her using her own money), distributions are not eligible for rollover to an IRA and normal RMD requirements of Sec 401(a)(9) do not apply. Tax deferred has a different meaning than "tax qualified". Improper rollover to an IRA would create an excess IRA contribution as well as being taxable. Hopefully, this is not NQ.

Best to get this question resolved before rolling the IRA that has been receiving these rollovers into the 401k. That would create a real mess.
It was purchased (with the "help" of a former financial advisor) by transferring money from her 401k over 5 years ago. The annuity says "IRA" under tax qualification.
OK, the rollovers are fine then, but best they be done by a direct non reportable transfer if possible since there is only one allowed 60 day rollover in a 12 month rolling period of time.
Thanks. I'm thinking we'll do this, and the plan would be to (on Monday) start a direct transfer to the IRA and after that arrives roll the IRA directly into the 401k (both the IRA and 401k are with Fidelity).

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