Here’s one question that keeps coming up: If I retire in the year when I turn 73 (or older) and want to directly roll over my 401(k) funds to an IRA, do I have to first take a required minimum distribution (RMD) from my 401(k)?
Well, RMDs normally don’t need to start until April 1 following the year you turn age 73 (or April 1 following the year you retire if you’re using the “still-working exception”). That April 1 is considered your required beginning date (RBD) for RMDs. So, it would SEEM THAT you shouldn’t have to take an RMD from your 401(k) if you do a rollover BEFORE that date.
But, as with many retirement account tax issues, what seems like a correct assumption turns out not to be. Your ability to defer your first RMD into the next year is trumped by three tax rules. First, a direct rollover from a plan is considered a distribution and then a rollover. Second, the first funds distributed to you in a year for which an RMD is required are considered part of the RMD (the “first-dollars-out rule”). Third, RMDs can never be rolled over. Putting all these rules together means that the first dollars distributed to you as part of a direct rollover in the year you retire on or after age 73 are part of the RMD and aren’t eligible for rollover.
What if the 401(k) 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amount, along with earnings or losses attributable to the excess amount (net income attributable, or “NIA”), are withdrawn from the IRA by October 15 of the year after the year of the rollover, you won’t have a penalty.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: Caitlin works for Fourth Fifth National Bank and participates in its 401(k) plan. Caitlin uses the still-working exception to delay plan RMDs beyond age 73. In 2025 at age 74, Caitlin retires and elects to roll over her entire 401(k) balance (worth $400,000 as of December 31, 2024) to an IRA. She knows that her 401(k) RBD is not until April 1, 2026. For that reason, she rolls over the entire 401(k) balance (including her 2025 401(k) RMD of $15,686) to the IRA. On February 1, 2026, Caitlin discovers that she now has a $15,686 excess IRA contribution. The IRA custodian tells her that the $15,686 excess has earned $1,000. She can fix the error without penalty by withdrawing $16,686 from her IRA by October 15, 2026. (The $1,000 in earnings will be taxable.)
Can Caitlin avoid taking the 2025 RMD from her 401(k) in 2025? Yes, by delaying her 401(k) distribution/rollover until 2026. But then she would have to take two RMDs – the 2025 RMD and the 2026 RMD – before rolling over the rest of her funds to her IRA.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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