RMD Avoidance Scheme: Birthdate Makes All The Difference

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As you may recall from this previous article, it is possible to use a rollover into an active 401(k) plan as an RMD avoidance scheme. Of course, this will only work as long as you’re employed by the employer sponsoring the 401(k) plan and you’re not a 5% or greater owner of the company. In addition, the rollover must be done in a timely fashion, prior to the year that you will reach age 70 1/2 in order to avoid RMD.

An example of where timing worked against a taxpayer (at least temporarily) recently came to me via the ol’ mailbag: 

We have the following client situation.

Client turned 70 years old this June 2014 and will turn 70½ this December 2014. Client is still working and contributing to the 401K plan at his current employer. He plans to continue working through this year, 2014 and next year, 2015. He is not a 5% owner so he would fall into the exception that allows him to continue to make contributions and he would not have to take a required minimum distribution (RMD) from his 401k plan as long as he continues to work at that employer. Client also has two IRA accounts, one a rollover from a prior employer’s 401k and one that he started a while ago. He would be required to take initial RMDs from each of these IRA accounts by April 1, 2015.

Question was raised as to whether the client could avoid taking these RMDs by rolling over his IRA accounts into his current employer’s 401K plan if that plan allows for rollover into its plan? We found your article from 2010, “Rolling Your IRA into a 401k to Avoid RMD” and thought we were alright but then an accountant we work with came up with the issue that the IRS treats any rollover in the first distribution year as a distribution including his RMD. The client would have been alright if his birth date had been July 1 or later or had he completed the rollover prior to January 1, 2014. Do you agree?

We have concluded that the client will have to take his required minimum distribution in 2014. However, if he goes ahead and rolls over the balance of the IRAs into the 401k accounts this year, he would not have to take any required minimum distribution for 2015 and beyond as long he keeps working for this employer. Do you agree?

My response to the email was as follows:

Yes, I agree with your (and the accountant’s) assessment. Had the client been born in July or later it would have made all the difference! The reason for this is that the RMD is calculated based on the ending balance of the prior year for any year that the taxpayer is required to take minimum distributions. Since his IRAs had a balance at the end of 2013 and he’ll be 70 1/2 years of age during 2014, he must take a minimum distribution from the IRA(s) for 2014. Rolling over the remainder of the IRA(s) before year-end 2014 will effectively eliminate that requirement for 2015, as long as he remains employed and is not a 5% owner of that employer.