By Denise Appleby, APA, CISP, CRPS, CRC, CRSP
If you are at least age 70 ½ by the end of the year, you must take required minimum distributions (RMD) from any Traditional IRA, SEP IRA and/or SIMPLE IRA (Traditional IRA) that you own. However, if you are still employed, you may be able to defer taking RMDs until you retire by rolling over your Traditional IRA into an employer sponsored qualified plan[i], 403(b) or governmental 457(b) plan.
With the exception of Roth IRAs, retirement account owners must begin taking RMDs from their retirement accounts for the year they reach 70 ½ and continue for every subsequent year. An exception applies to employer sponsored qualified plans, 403(b)s and governmental 457(b) plans, allowing participants who are still employed by the plan sponsor to defer beginning RMDs past age 70 ½ until they separate from service with the plan sponsor.
Qualified Plans Not Required to Allow Deferral of RMD
While the regulations do allow participants to defer beginning RMDs past age 70 ½ for qualified plan participants, the plan sponsor has the option of choosing whether to allow such deferral. Therefore, you should check with your employer to determine if the RMD-deferral option is available to you.
RMD Amounts Are Ordinary Income
Generally, RMDs are treated as ordinary income for the year the distribution occurs, and any pre-tax amount is therefore subject to ordinary income tax. IRA owners who do not need the income from RMDs to cover living expenses may prefer to defer taking such distributions for as long as possible. Deferring RMDs can allow for continued tax-deferred growth on the amount until the RMD rules begin to apply.
Deferring IRA RMDs by Rollover
The option to defer taking your RMDs past age 70 ½ until retirement does not apply to your Traditional IRAs. Therefore, if you prefer not to take RMDs until you retire, you can do so by rolling over the amount to an employer sponsored retirement plan that allows such a deferral. But see the article How to Avoid RMDs by Converting to Roth IRAs for another solution. When performing such a rollover, the following are some factors that must be taken into consideration:
- 2-Year Limit on SIMPLE IRAs: If the rollover is being made from a SIMPLE IRA, it is not permitted unless the SIMPLE IRA has satisfied the two-year rule.
- RMD for The Year Is not Rollover Eligible: The RMD due for the year the rollover occurs must be withdrawn before initiating the rollover. This is because RMD amounts are not rollover eligible, and your first distribution during an RMD year includes your RMD.
- You Cannot Rollover After-tax Amounts: Only pre-tax amounts can be rolled over from your IRA to an employer sponsored qualified plan, 403(b) plan or governmental 457(b) plan. If your Traditional IRA includes any basis, that amount cannot be rolled over. Basis in Traditional IRAs source from nondeductible IRA contributions and rollovers of after-tax amounts from employer sponsored qualified plans and 403(b) accounts .
- You Cannot Rollover Amounts Ineligible to Be in Your Traditional IRA: Amounts that are not eligible to be in your IRA cannot be rolled over. This includes any excess IRA contributions and amounts disqualified as a result of any prohibited transaction.
- The Rollover is Permitted Only if Allowed Under the Plan: The decision to allow rollovers from IRAs is made by the plan sponsor. Some allow rollovers from all Traditional IRAs and some will accept rollovers only from conduit IRAs. As such, you should check with your employer or plan administrator to determine if you are allowed to rollover amounts from your IRA into the plan.
Bear in mind that you are not eligible for the RMD deferral option if you are a 5 percent owner of the business that sponsors the retirement plan,
If you are unsure of whether the amounts in your IRA are rollover eligible, please consult with a financial or tax professional who is knowledgeable about IRA rollover rules.
Weigh and Review Your Options
Rolling over amounts from your Traditional IRA to an employer sponsored retirement plan can allow you to defer RMDs as well as allow the amounts to continue accruing earnings on a tax-deferred basis. However, whether that is the most suitable option for you depends on your financial and tax profile. Talk to your financial and/or tax professional, who should be able to help you to choose your most suitable option.
[i] Qualified plans include 401(k)s, pensions, profit sharing and stock bonus plans