IRA Rules

Question: Would an IRA rolled-over from a 401(k) be subject to the same mandatory distribution rules at age 70 1/2?

Suppose I’d like to roll over an inactive 401(k) plan to a roll-over IRA. Normally the 401(k) would face mandatory distribution for each of the some 15 (?) years of life-expectancy beyond age 65. So for example I believe a $1.5M balance would have to be drawn down to zero in 15 years. (That doesn’t mean the money would disappear, withdrawals had to be taxed). Would I be able to defer tax with an IRA and pass it onto my children after I die?

Answer: 401(k) and IRA are currently subject to the same RMD (starting age 70.5).

One thing you may want to consider is gradually converting some to a Roth IRA (unless your income is too high). Tax would be due on the amount converted which is best paid from other sources (I reduced my W-4 allowances to increase withholding). If withholding is taken from the distribution, the withholding itself would be subject to 10% penalty.

There is no required minimum distribution from a Roth IRA, so it can continue to grow indefinitely past retirement (to cover inflation in later years, a lump sum without tax, or to leave to heirs).

There will be a special deal in 2010 to convert and then spread tax over 2011 and 2012. But I have been converting gradually about $10,000 per year to stay under the next tax bracket.

PS: It is best if any retirement plan beneficiaries are real people, not your estate or trust.

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