Be Careful With 401(k) Rollovers as You Reach Age 70

Salting away funds in a 401(k) plan is not only prudent; it’s psychologically satisfying. But the IRS doesn’t intend for you to keep funding your plan and deferring the taxes forever; there are special rules that mandate that you begin taking required minimum distributions (RMDs) in the year that you reach 70 ½. Calculating the RMDs can lead to hair pulling; you may even need to hire a professional. Bear in mind that as you reach the age of 70, if you intend to rollover your 401(k) into an IRA account, special rules apply and caution is advised. Here are some points you should keep in mind.

First, IRS is Serious About Required Minimum Distributions

Regardless of a taxpayer’s financial need, the IRS generally requires owners of traditional IRAs, 401(k) plans, simplified employee pensions, and other retirement accounts to begin taking RMDs – and paying the resulting tax – by April 1 of the year after they reach age 70 ½. Failure to do so results in a 50 percent excise tax on the RMD amount not distributed.

Second, In the Year You Turn 70 ½, Take Your RMD from 401(k) Before the Rollover

If you still have the 401(k) account on the first day of the year in which IRS rules require you to take a distribution, you must take that distribution from the 401(k) account before you roll the account over to your IRA account. If you rollover and then take a distribution, it won’t count as an RMD and you’ll be penalized. In the years after the rollover, you will only have to make the RMD withdrawal from the IRA.

Third, Multiple Plans Require Aggregation of RMDs

If you are a participant in more than one ERISA qualified plans, your RMD must be determined for each plan separately, and each RMD amount must be distributed from that particular plan. RMD amounts for qualified plans cannot be distributed from an IRA. If you have multiple IRA accounts (or multiple 403(b) accounts), you may aggregate the RMD for all similar plans and then take that amount from one account in each type of plan.

Fourth, Death or Divorce Do Not Affect Current Year’s RMD Calculations

If the taxpayer is married on January 1, he or she is treated as married the entire year for purposes of RMD. Therefore, if you divorce or if your spouse dies later in the year, the RMD must be calculated without regard to the change in marital status.

Takeaway: Be Careful As You Near 70 Years of Age

The points noted above are not an exhaustive listing of all the factors that come into play with RMD calculations, roll-overs, and the like. Your situation may be unique. It’s always good to check with a professional advisor. As they say, “Better safe than sorry.”

Wealth Management and Asset Preservation

The law firm of CKB VIENNA LLP has a long history of representing high-net-worth individuals, substantial closely held and family businesses, and others with all sorts of wealth management issues. Our attorneys provide counsel on estate, gift and generation-skipping transfer tax planning, sophisticated charitable giving, tax controversies, using life insurance as a planning tool, business succession planning, asset protection, charitable organizations and private foundations. We don’t stamp out cookie-cutter solutions; we first gain a true understanding of the client’s goals, concerns, and unique issues. Then we work with the client to achieve success. CKB VIENNA has offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone at 909.980.1040 or complete our online form.