Here’s a question we get asked often: Say you retire in the year you turn age 73 (or in a later year) and you want to roll over your 401(k) funds to an IRA. Do you have to take a required minimum distribution (RMD) before rolling over the remaining funds?
The answer is yes, but at first glance that doesn’t seem right. After all, RMDs normally don’t need to start until April 1 following your age 73 year (or April 1 following the year of retirement if you’re using the “still-working exception” to delay RMDs). That April 1 is considered your required beginning date (RBD) for RMDs. If the 401(k)-to-IRA rollover takes place before the RBD, why would an RMD be required?
It would be required because of the interplay between three tax rules. First, the first funds paid to you in a year for which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Second, the first year for which an RMD is required is not the year of the RBD – it’s the year of retirement (that is, the year before the year of the RBD). Third, RMDs can never be rolled over. Putting all these rules together means that the first dollars received in the year you retire on or after age 73 are part of the RMD and aren’t eligible for rollover.
What if the RMD is rolled over? Then, you have an excess IRA contribution. But that’s not as bad as it sounds. As long as the rolled-over amount – along with earnings or losses attributable to the excess amount (“net income attributable” or “NIA”) – are withdrawn from the IRA by October 15 of the year after the year of the rollover, you won’t have a penalty.
Example: Tara participates in her company’s 401(k) plan. She uses the still-working exception to delay plan RMDs beyond age 73. In 2025 at age 74, Tara retires and wants to roll over her 401(k) balance of $400,000 to an IRA. She is aware that her RBD for plan RMDs is not until April 1, 2026. So, she rolls over the entire $400,000. However, because her 2025 RMD (assume $15,000) wasn’t eligible for rollover, she now has an excess contribution in the IRA. Tara can fix the error without penalty by withdrawing the $15,000, along with the NIA, from the IRA by October 15, 2026.
Is there a workaround for Tara to avoid taking a 2025 RMD from her 401(k) in calendar-year 2025 if she retires that year? Yes, by keeping her 401(k) funds in the plan and delaying the rollover until 2026. But then she would have to take two taxable RMDs in 2026 – the 2025 RMD and the 2026 RMD – before rolling over the rest of her funds.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Investment advisory services offered through Donato Wealth Management, PLLC, dba Empower Wealth Management and Empower Wealth & Tax (“Empower Wealth Management” or “EWM”),
an SEC registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional adviser before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned, or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Personal investment advice can only be rendered after the engagement of EWM, execution of required documentation, and receipt of required disclosures. All investment and insurance strategies have the potential for profit or loss. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. Past performance is no guarantee of future results. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD #305031.
Insurance products and tax services are offered through Senior Tax and Insurance Advisors, PLLC, dba Empower Wealth Group (“Empower Wealth Group” or “EWG”). Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products offered through EWM. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. EWG is not affiliated with or endorsed by the U.S. Government, Social Security Administration, nor the federal Medicare program. You may be contacted by a licensed insurance agent. Calling the number above will direct you to a licensed insurance agent. EWG may not offer every plan available in your area. Any information provided is limited to plans available in your area. Please contact Medicare.gov or 1-800-MEDICARE.
EWM and EWG are both affiliated companies of Empower Wealth, LLC (“Empower”). Investment adviser representatives of EWM may have a financial incentive to recommend tax and insurance products and/or services offered through EWG which presents a conflict of interest. This conflict is addressed by EWM’s adoption of its Code of Ethics, which requires that all EWM’s Associated Persons place the interest of clients ahead of their own. Clients of EWM are also free to choose their own tax and/or insurance professionals and are under no obligation to utilize the services offered through any related entities or persons associated with Empower.
Strategic Partners listed on this page are not employees of EWM and are not affiliated through common ownership.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.
© Empower Wealth Management All Rights Reserved.