401K Rollovers and RMD

[sfowjr66]

I am doing my dad's taxes. He is 76 and will retire in May 2022.  His preference is to postpone first RMD until 2023.  He has 401K Plan from his employer. He wants to rollover some of the contents of his 401K as follows:

1. He has money in 401K Roth which he wants to rollover all of it, both basis and earnings,  to his Roth IRA outside of his employers 401K plan.  Can he do so without triggering requirement for RMD this year?

2. He has made post tax contributions to his 401K that is not in the Roth 401K.  He wants to now rollover the post tax contribution amount (the basis) to his Roth IRA.  He wants to rollover the earnings of the after tax contribution to his "street" IRA. Will he be able to make these two rollovers without triggering RMD requirement for 2022?

Thank youl

[dmertz]

Because your father will retire in 2022, 2022 becomes his first RMD year.  Because he will be subject to RMDs for 2022, he is not permitted to do any rollovers from the 401(k) until he satisfies his 2022 RMD from the 401(k) accounts.  If he wants to postpone 401(k) RMDs until 2023, he can't do the rollover from the 401(k) until 2023.  That includes the Roth 401(k) because Roth 401(k)s are subject to RMDs.  If he waits until 2023 to do the rollovers so that he doesn't have to take the 2022 RMD  in 2022, he'll have to take the 2022 and 2023 RMDs from both the traditional 401(k) and Roth 401(k) accounts before rolling over the remainder.

He'll want to evaluate if it makes sense to take the 2022 Roth 401(k) RMD in 2022 and roll over the Roth 401(k) to a Roth IRA in 2022 so that he will have no 2023 RMD from a Roth account.  He'll generally want to do a split rollover of the traditional 401(k) with the after-tax portion rolling over to a Roth IRA and the pre-tax portion rolling over to a traditional IRA.  He might want to evaluate whether it makes sense to take the RMD for the  traditional 401(k) in 2022 and do the split rollover of that account in 2022 so that there is more after-tax money that makes it to the Roth IRA than would be the case if he did the split rollover in 2023 after taking the 2023 RMD.

[sfowjr66]

Thank you for your detailed response. But I am puzzled by something you said in first paragraph.  Since he has not yet retired in 2022, it was my understanding that he is permitted to rollover the Roth 401k amount to his Roth IRA without a requirement for an RMD in 2022 for the Roth amount as long as he completes the rollover before his retirement date.   Do I have that wrong?

Thanks again.

[dmertz]

If he retires in 2022, 2022 becomes his first RMD year and any distribution made during that year, including those made before retirement, is RMD until the RMD for the year is satisfied, ineligible for rollover.  If the entire 401(k) is rolled over in 2022 and he then retires later in 2022, the distribution that was rolled over reverts to having been partially RMD and an RMD that was impermissibly rolled over to the IRA.  The part that was impermissibly rolled must be treated as a regular contribution to the IRA and an excess contribution to the extent that it exceeds the amount that he is eligible to contribute as a new contribution for 2022.  The relative dates of the distribution and retirement are immaterial.  It doesn't matter in which order they occur within the same calendar year, the consequences are the same.

[LKT89]

Regarding "Because he will be subject to RMDs for 2022, he is not permitted to do any rollovers from the 401(k) until he satisfies his 2022 RMD from the 401(k) accounts. "...would you be able to direct us to the specific IRS publication that would reference and detail this RMD requirement and rule? Thank you for your input and assistance with this.

[dmertz]

CFR 1.402(c)-2 Q&A-7:  https://www.law.cornell.edu/cfr/text/26/1.402(c)-2