Re­quired 401(k) dis­tri­bu­tions can be de­ferred

Albuquerque Journal - - BUSINESS OUTLOOK - Jim Hamill

Q: I have a large bal­ance in a 401(k) plan with my em­ployer and turn 70-1/2 in 2019. I know that gen­er­ally I must take my first dis­tri­bu­tion by 4-012020. But there is an ex­cep­tion if I con­tinue to work. The HR peo­ple tell me I need to con­sult with my own tax ad­viser to de­ter­mine how this still work­ing ex­cep­tion to tak­ing re­quired dis­tri­bu­tions works. Can you ex­plain the rule?

Cer­tainly. As you state, a par­tic­i­pant in a qual­i­fied re­tire­ment plan such as a 401(k) must gen­er­ally take re­quired min­i­mum dis­tri­bu­tions in the year that they turn 70-1/2.

The tax law al­lows the first RMD to be de­ferred un­til April 1 of the year af­ter you reach 70-1/2. If you de­fer the first re­quired dis­tri­bu­tion you must then take two RMDs in the sec­ond year.

An ex­cep­tion to this rule al­lows you to de­fer the first dis­tri­bu­tion un­til April 1 of the year af­ter you re­tire. So if you con­tinue to work for the en­tire 2019 cal­en­dar year, you will not need to take the first RMD by April 1, 2020.

This rule ap­plies only to qual­i­fied re­tire­ment plan dis­tri­bu­tions and not to IRAs (in­clud­ing SEPs). A 401(k) is a qual­i­fied plan, so the de­fer­ral op­tion is avail­able. If you also have any IRA ac­counts you will still be re­quired to start RMDs.

The mean­ing of “re­tire­ment” is not clear but is tied to the em­ployer’s plan for which RMDs would other­wise ap­ply. This means sev­eral things.

First, if you have bal­ances in sev­eral qual­i­fied em­ployer plans be­cause you have worked at mul­ti­ple em­ploy­ers, the de­fer­ral op­tion ap­plies only to the bal­ance in the plan of your cur­rent em­ployer.

Sec­ond, since the ex­cep­tion ap­plies to the cur­rent em­ployer’s plan, the cur­rent em­ployer should be the party that de­cides whether you are still work­ing or have re­tired. You need not work full time if the em­ployer con­sid­ers you to still be em­ployed.

There is an ex­cep­tion to this ex­cep­tion for em­ploy­ees who own more than 5 per­cent of the em­ployer. I will as­sume that you do not own more than 5 per­cent, so that you are other­wise el­i­gi­ble for the ex­cep­tion.

The de­fer­ral ap­plies to April 1 of the cal­en­dar year af­ter you re­tire. If you re­tire on De­cem­ber 31 you are treated as hav­ing re­tired in that cal­en­dar year.

This means that you must gen­er­ally take your first RMD, for the 2019 year, by April 1, 2020. If you re­tire any­time dur­ing 2019, in­clud­ing on De­cem­ber 31, you must still take the first RMD by April 1, 2020.

If you are treated as still em­ployed un­til, say, some­time in Jan­uary of 2020, you can then de­fer the first RMD un­til April 1, 2021.

Q: My son took a new job in New York City that pays $75,000 per year. The em­ployer of­fers a 401(k) plan with a 75 per­cent match­ing con­tri­bu­tion. I have told my son that he should max­i­mize his con­tri­bu­tion to take ad­van­tage of the very gen­er­ous em­ployer match. He does not want to do this be­cause it is so ex­pen­sive to live in Man­hat­tan that he has no ex­tra cash to make a con­tri­bu­tion with. I know I can give him $15,000 each year with­out fil­ing a gift tax re­turn. If I give him $15,000 con­di­tioned on his mak­ing a 401(k) con­tri­bu­tion is that OK?

Yes, that is fine. The way that plan would work is that you would need to make a gift to him with the ex­pla­na­tion that you will con­tinue to make gifts in fu­ture years pro­vided he makes an elec­tive de­fer­ral con­tri­bu­tion to the em­ployer’s plan equal to your gift.

If he ac­cepts the gift and does not make the con­tri­bu­tion, you can­not de­mand the gifted money back, but you can fol­low through on the con­di­tion that fu­ture gifts will cease if he does not make a

401(k) con­tri­bu­tion.

I agree that the em­ployer’s plan is ex­tremely gen­er­ous and that your son should make a plan con­tri­bu­tion. You may want to con­firm with your son that the match ap­plies to all con­tri­bu­tions and not some capped amount. That knowl­edge may af­fect how much you want to gift to him.


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