The Trust Company of Tennessee

RMDs on Roth 401(k)s (effective 1/1/2024)

For clients who will be age 73 by the end of this year:

• For living participants who are owners (regardless of active/term status):  
  1. RMDs are required on the Traditional Source
  2. If owner requests an in-service distribution or a rollover
     • Owner must take the RMD amount from the Traditional source first.   
     • Roth Account balance should be excluded from the RMD calculation
     • Only Traditional source distributions will count towards satisfying the RMD.

• For living participants (actively employed, non-owners): 
  1. No RMDs required if they remain active through end of the year, but the RMD could be applied retroactively if they do terminate before year end.
  2. If participant requests an in-service distribution
     • Active Participant should be advised to take the requested distribution from the Traditional source in case client does terminate before year end, sparking that retroactive RMD requirement.
     • If an RMD calculation is done, the Roth Account balance should be excluded from the RMD calculation.
     • Only Traditional IRA distributions will count towards satisfying any RMD.
  3. If active participant requests a rollover
     • Participant should be advised to take an amount that would satisfy the RMD (Roth excluded from calculation).  We cannot force them to take an RMD.  However, if the client chooses to skip the RMD and they terminate before year end, they might have to amend their tax return.
     • RMD (if taken) should be taken from the Traditional Source
     • If participant has been warned of the risk of skipping the RMD, the CSR should document the file that they were advised to take it and can allow them to proceed with the rollover without taking it.

• For living participants (terminated)
  1. RMDs are required on the Traditional Source
  2. If terminated participant requests a distribution or a rollover
     • Terminated participant must take the RMD amount from the Traditional source first.   
     • Roth Account balance should be excluded from the RMD calculation
     • Only Traditional IRA distributions will count towards satisfying the RMD.

• For Beneficiaries in the year of death:  
  1. Beneficiary must take any remaining RMD that the deceased participant did not take.
  2. The year of death RMD excludes the Roth balance in the calculation.   
  3. The distribution should be taken from the Traditional Source since only Traditional distributions will count towards satisfying the RMD.
  4. It is possible for any beneficiary to satisfy the deceased participant’s remaining year of death RMD.  For this reason, you will need to look at distributions for all beneficiaries up to this point to determine if RMD was met or not.  
     • If one (or more) beneficiaries have not met the full RMD up to this point, then reduced FTW is available to any future distributions UP TO THE POINT of the full RMD.  
     • If the RMD has already been satisfied by any one (or more) beneficiaries, the remaining distributions are treated as normal distributions with standard 20% FTW.
  5. Spousal beneficiaries use their age rather than decedent for RMD calculation. 

• For Beneficiaries in years after death:
  1. Beneficiary must take a newly calculated RMD based on their own situation.
  2. Roth balances are INCLUDED for RMD calculation
  3. Roth Distributions DO satisfy the RMD for that year.
  4. Distributions can come from any source
  5. By this time, the beneficiary accounts should be separated and each bene must take their own RMD.  It can’t be satisfied by any other beneficiary.
  6. Spousal beneficiaries use their age rather than decedent for RMD calculation.

Requirement Information

IRS site: FAQs regarding RMDs

Recent updates: 

SECURE 2.0 Act of 2022

New Retirement Payment Withholding Procedure

Tax Information

Special Tax Notice - Rollover Options: L:\FORMS\DISTRIBU\DISTRIBUTION FORMS

   RMDs are NOT eligible for rollover

   The Special Tax Notice is not required for RMDs, but it could be helpful for plan ptps

W-4R (Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions): L:\FORMS\DISTRIBU\DISTRIBUTION FORMS

Existing elections will show in Relius User Defined Field #69

What is an RMD?

Required Minimum Distribution (RMD): Definition and Calculation (investopedia.com) 

A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age.

What plans require an RMD? 

Qualified Plans - 401k, 403b, 401(a)/457, ESOP

Who is eligible to take an RMD?

Required minimum distributions start after age 70-1/2 (if you were born before July 1, 1949) or age 72 (if you were born after June 30, 1949) for all plan participants who are not employed but still have funds in the qualified retirement account, unless the plan participant is a 5% owner of the company (or more). Effective Jan 2023, required minimum distributions start after age 73. Anyone who was previously eligible for RMDs remain eligible, except for the 5% owner rule. 

RMD eligibility is based on the year the participant turns of age. The year the participant becomes eligible, they should have the RMD paid by December 31 of that year. Since it's their first year, the IRS provides a buffer to the December 31 due date. This is generally in April around the tax deadline. Whatever that date is, also known as the Required beginning date or RBD, is the latest the first RMD can be satisfied without penalty. If the RMD is distributed in April of the following year, the participant must take an additional RMD to satisfy the current year requirement by December 31. 

If an active participant turns age 73 in December, and wants to take a rollover distribution in March, we must satisfy the RMD first. Then we can process the rollover. Please see the TTC Policy regarding active plan participants that have reached RMD age.

• A non-owner client does not have to take an RMD for a year if they are employed with that company through December 31st of that year.
• The first money distributed from the account counts towards the RMD.
• IRS does not permit participants to rollover their RMD.
• If a participant does accidentally rollover their RMD, there is a complicated and sometimes costly fix to correct that.  

TTC Policy: if an active participant asks to roll over their account in the middle of the year, we always take the RMD BEFORE the rollover happens. This policy protects The Trust Company from processing time-consuming corrections. It also protects our aging participants from frustrating corrections that might actually cost them additional money. This policy is in place because:

1. RMD status is NOT determined at the point of a distribution.  It is based on their active/terminated status as of 12/31 of a year.  Therefore, mid-year, you can’t accurately state that a client is not subject to an RMD because they might terminate before year end.
2. If a client does rollover their balance mid-year and later terminates, the RMD requirement is determined retroactively and the client is suddenly in a situation where they improperly rolled over their RMD, subject to all those corrections described above.
3. Even if the client reserved some money here to pay the RMD amount, the IRS will not allow them to satisfy it with REMAINING assets because the FIRST MONEY OUT is considered to be the RMD.  Distributions that happen AFTER the rollover will not count for the RMD.  Instead, the IRS will require them to request the original BACK from the new custodian.

Waiver of Policy Allowed: This policy CAN BE WAIVED by the Relationship Manager of the account. However, that waiver should only be requested if the following are true:

• The client has adamantly requested that they don’t want to take the RMD.
• The client is a high-net-worth client or one in which it is important to retain the relationship for future growth.
• The client is absolutely sure there is no possibility of terminating before year end and the client understand that if they DO terminate, they will be required to un-do their transaction and may have to amend their tax return and incur additional cost.

What are the Federal Tax Withholding (FTW) options for RMDs?

Normal employer plan distributions that are made payable to taxpayers and that are eligible for rollover are subject to mandatory 20% FTW. Employer plan distributions that are not eligible to be rolled over - such as RMDs or hardship distributions - are subject to different withholding rates based on whether the distribution is a periodic distribution or a nonperiodic distribution. For nonperiodic distributions, a standard 10% withholding rate applies unless the recipient elects to waive withholding or to withhold at a different rate. Withholding elections for nonperiodic distributions will be made on the IRS Form W-4R. No withholding election rate = 10% default rate. Ascensus - We help more people save through partnerships with leading financial institutions and state governments. 

Previous withholding elections saved here: L:\Alloca\Installment Election Forms\Non-Periodic, W-4P Forms and Tax Forms

   Starting in 2023, FTW withholding elections will ONLY be on the form W-4R.

How to determine RMD amounts?

All RMD calculations are based on the previous year balance on 12/31. For example, 2022 RMD amounts are based on account balances as of 12/31/2021. Relius runs this calculation. To generate the report, follow these procedures: Relius CSR Procedures.docx - page 5.

Updates amounts as of 2024. For account we confirm with Sara Hill and IRA Compliance, check the spreadsheet here: 2024 Qualifed Plan RMD Spreadsheet.xlsx (sharepoint.com) 

    Death Accounts

    QDROs

    Self-Directed Accounts

Red - verify with IRA Compliance 

Instead of emailing to confirm RMD amounts, check the spreadsheet

    Then check for any distributions in the year that may count towards the RMD 

        Loan offsets count toward the RMD.

        Normal taxable distributions (lump sum payments) count toward the RMD.

        Testing refunds (ADP/ACP refunds) do not count towards the RMD.

        Rollovers do not count towards the RMD.

How can RMDs be paid out?

As long as the payment is taxable, the payment can be made. Generally, payments are made directly to the plan participant. In some cases, RMs will request payments be made to internal TTC IMAs. As long as we have the Account # added to special notes in the ticket, we can transfer to the TTC IMA. 

RMDs to TTC IMA (example: 40821)

   IMA instructions can be added to special notes section in ticket

   If distr request is only for RMD, we only need to confirm FTW and use RM email as the request

RMDs and scheduled payments

RMDs can be set up to be paid over the course of the year. Use the Election for Installment or Variable Distribution Form to have the RMD set up. Saved here: L:\Alloca\Installment Election Forms

*******these may have to be completed each year*******

How to correct an rollover (that should have been an RMD) Ineligible Contribution to the IRA

-    The plan corrects the YYYY 1099R to show the RMD that should have happened

-    Ptp will have to request a Return of Excess Contribution from the IRA. (of RMD amount plus earnings which will be taxable)

-    Ptp will have to be sure to report all this on her tax return appropriately

When are RMDs paid out by TTC?

We will send a letter in the beginning of the year (March) to everyone eligible to take an RMD at that time. This list will not include individuals who may end employment after the mailing.

We will generate an updated list at the end of September to capture those who have taken the RMD and those who may have ended employment by now. 

All remaining RMDs will be processed as a lump sum with 10% FTW and mailed to the address on file.

Please consider this when people call in requesting scheduled payments for RMDs.

Mid-year requests for full rollovers while RMD age (still active)

Technically, you don’t have to take an RMD until the year you retire.  But the year isn’t over.  She could still retire before year end.  If she did (or if she died), the RMD is required retroactively, even if she has already rolled out.  So corporately, decision was made to require RMDs if a client was rolling over mid-yearr.  Otherwise, complicated corrections are necessary to fix the fact that we allowed a rollover in the year of a RMD.  

Taking a Call about RMDs

   Once the report is produced - generate a Freshdesk ticket. If it is a request to take the RMD funds only, use the RMD Only Request template. Save the report as a note after creating the ticket.

   If the request is for a FBO/Directed account or a Death/Beneficiary account - verify the RMD amount with Sara Hill.

    The Freshdesk ticket: 

• Add the RMD Amount from RA to RMD?:
• Add the FTW requested from the ptp to RMD FTW?: [for help, see What are the Federal Tax Withholding (FTW) options for RMDs?]
• Note if you have checked with IRA Compliance/Sara Hill, if applicable.
• Add payment instructions to Direct Deposit?: 
• Add how forms were sent to plan ptp, if applicable to Ppwk sent via:

FAQs: Helpdesk : The Trust Company of Tennessee (freshdesk.com)