Q&A: How Do I Calculate My RMD from a Complicated 401(k)-to-IRA Rollover?

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I recently received the following question:

I am 75. I retired in the fall of last year and started the process to rollover my 401(k) plan into my IRA soon after. Most of the assets arrived in my IRA in November, however a residual check was issued during the last week of December from my 401(k) for my IRA with a small sum. The check was not deposited into my IRA by the custodian until the first week of January.

My question is, do I need to do anything with this balance for my RMD? The assets were sort of nowhere on December 31st since they were in the mail on a check.

Among the most complicated and frustrating IRA rules are required minimum distributions (RMDs). Your case is a classic example of the complexity.

Obviously, assets in IRA are subject to RMDs so long as you are older than the required beginning date (RBD) of age 70 1/2. The amount which you are required to take as a distribution is based on the value of your traditional retirement account on December 31 of the previous year. That value is divided by a number (hereafter called the divisor) provided by the IRS based on the age you will be turning this year. For example, the divisor at age 70 is 27.4. You can use the calculator at “How to Calculate Your RMD: a Uniform, Inherited, and Joint Divisor Calculator” to see what later years are.

If you do not own the company, employer sponsored plans like 401(k), 403(b), and 457 plans are only subject to RMDs in the year you both reach age 70 1/2 and are terminated from your employment with the sponsoring employer.

If you are more than a 5% owner of the company that sponsors the plan, then you must start RMDs in the year you reach age 70 1/2 regardless of whether you are still employed.

Because you retired last year, your 401(k) plan required RMDs last year. (If you missed taking your RMD, you should correct your mistake as soon as possible.) This means that those assets are certainly subject to RMDs this year as well, including that check that was in limbo.

However, because the check was not deposited into your IRA before January 1st, it means that it was not included in your end of year account value. To fix this mistake, you will need to add the amount that was on the check to the end of year value of your IRA according to your statement. And then recalculate your RMD by dividing this new corrected end of year value by the divisor.

If your IRA was worth $100,000 and the check had $500 on it, this would mean adding the two for a corrected value of $100,500. Then, you would look up the appropriate divisor. If your maximum age this year is 76, for example, that would be a divisor of 22.0. So $100,500 divided by 22.0 equals $4,568.18 as an RMD or $22.73 more thanks to the extra $500.

Although our clients are ultimately responsible, we provide assistance in calculating and implementing our client’s RMDs, both traditional and inherited, each year as a part of our Comprehensive service or as a Bonus Service for our Do-It-Yourself service level.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine