Question: In February I passed the 70 ½ (seventy and one-half) age mark. As I understand it, prior to the end of this year I must take my first required minimum distribution (RMD). I have two accounts, an IRA account and a much larger 401(k). As long as I take out enough dollars in total to meet the RMD, can I draw down the small IRA in total before I take any distributions the 401(k)?
Answer: No. You cannot take a distribution from your IRA account to satisfy the required minimum distribution (RMD) from your 401(k) plan. However, you can roll over your 401(k) plan into a second IRA account and then take the total annual required minimum distribution amount from either one of the IRA accounts. Here are the rules:
1. 401(k) Accounts: You must calculate the RMD separately for each 401(k) plan you have, and then you must take the required distribution separately from each plan.
2. IRA and 403(b) Accounts: You must calculate the RMD separately for each IRA and 403(b) plan you have, but unlike 401(k) plan rules, you can take the sum of the IRA RMD’s from one IRA and the sum of the 403(b) RMD’s from one 403(b) arrangement. You must take separate distributions for each type of account. In other words, your RMD for your IRA accounts must come from an IRA account and your RMD for your 403(b) accounts must come from a 403(b) account.
To simplify your life, you should consider rolling over your 401(k) account to an IRA. The advantages for you would be:
1. You would be able to do what you asked about in your question. That is, you could calculate your RMD for each account and then take the total amount from the small IRA.
2. You will have more investment flexibility. 401(k) plans usually restrict the investment choices to a small group of mutual funds. If you roll your 401(k) plan into an IRA account with a brokerage firm, you can invest in any publicly traded security, including stocks, bonds, ETFs, and mutual funds, including index funds with low fees.
3. If you have more than one beneficiary, you can create a separate IRA account for each. And when you die, each beneficiary can create an inherited IRA account and make withdrawals over his or her lifetime.
Before you decide to roll over your 401(k) into an IRA account, talk to your attorney if you are concerned about creditors or bankruptcy. In general, IRA’s are less protected than 401(k) accounts. If you have any appreciated stock in your 401(k) from the company you worked for, talk to your tax or financial advisor. You could be eligible for a tax break on the net unrealized appreciation in the stock if you take it as a distribution instead of including it in your rollover.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.