RMDs Before Rollovers
According to a 2024 research report from the Investment Company Institute, 62% of U.S. household have IRAs that have been funded with rollovers from employer plans. An estimated $595 billion worth of such rollovers occurred in 2020. Care needs to be taken that these transactions are handled properly, to avoid unexpected tax traps.
Once a taxpayer reaches age 73, he or she must take Require Minimum Distributions (RMDs) from tax advantaged retirement accounts. The first dollars being distributed from the account are considered to be RMDs.
Example. Taxpayer turns 73 this year, and plans to retire. In anticipation of this happy event, Taxpayer arranges to have his entire 401(k) balance rolled over into an IRA. He makes the smart choice of have a direct rollover to the IRA custodian, avoiding the need for withholding taxes on the transfer. However, Taxpayer inadvertently has now rolled his RMD into his IRA, which is an excess IRA contribution.
The better way. Taxpayer determines that his RMD will be $40,000 this year. He orders a distribution to himself of the entire amount of the RMD, then orders the rollover of the balance of the account. With this approach, there is no question of even a temporary excess IRA contribution.
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