In a Qualified 401(k) plan, a participant must begin Required Minimum Distributions (RMD’s) in the year he or she reaches age 70 1/2. This rule also applies to Pre-tax IRA’s. However, there is an exception to this rule when it comes to Roth IRA’s. This provides for a tax planning opportunity for those who have Roth 401(k).
If you have Roth deferrals in your 401(k) plan, and you want to decrease the amount of your taxable RMD, you can do a direct rollover of your Roth funds from your 401(k) to a Roth IRA prior to the year you turn 70 1/2. By doing this, you decrease the balance in your 401(k) plan, which in effect decreases your RMD from the plan. The Roth funds are now in a Roth IRA, which does not require distributions at age 70 1/2.
As an example, Participant A has a balance in her 401(k) plan at December 31, 2017 of $150,000. Of that, $50,000 is Roth, $100,00 is pre-tax. If she turns 70 1/2 during 2018, her 2018 RMD will be calculated based on the balance of $150,000. If, on the other hand, she does a tax free direct rollover of $50,000 to a Roth IRA during 2017, then her 2018 RMD will be calculated based on the December 31, 2017 balance of $100,000. This will reduce her 2018 taxable income. The $50,000 Roth IRA does not have Required Minimum Distributions. This $50,000 will continue to grow tax free until she is ready to take distributions.
If you have questions about this strategy, please contact Anne Christian at email@example.com.