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401(k) RMDs in the Year of Retirement Thumbnail

401(k) RMDs in the Year of Retirement

If you’re retiring at age 73 or older and you plan to roll over your 401(k) to an IRA, there’s a crucial question to answer first:

Do you have to take a required minimum distribution (RMD) before completing the rollover?

Yes, you do.

While that may seem counterintuitive—especially if your required beginning date (RBD) is technically in the following year—IRS rules treat the year of retirement differently when it comes to 401(k) RMDs. Failing to understand this rule could trigger a costly tax mistake in the form of an excess IRA contribution.

Here’s what you need to know to plan your rollover the right way and avoid penalties.

401(k) RMDs in the Year of Retirement


What Triggers RMDs From a 401(k)?

In general, RMDs from a 401(k) must begin:

  • By April 1 of the year after you turn age 73,
  • Or by April 1 of the year after you retire—if you qualify for the still-working exception.

This April 1 deadline is your required beginning date (RBD). However, RMDs are triggered by the year itself, not by the RBD.


Key IRS Rules That Affect 401(k) RMD Rollovers

Three IRS rules work together to complicate the rollover process when you retire in an RMD year:

1. First-Dollars-Out Rule

Any distribution made in a year where an RMD is required is considered to first satisfy the RMD. This means if you take any amount from your 401(k), the first portion is automatically counted as your RMD for that year.

2. RMD Year Is the Year of Retirement

The year for which the RMD is required is not the year of the RBD—it’s the calendar year in which you retire (if after age 73). This distinction is essential.

3. RMDs Cannot Be Rolled Over

The IRS does not allow RMDs to be rolled into an IRA or any other retirement plan. Attempting to roll over an RMD results in a non-qualified transaction.


Putting the Rules Together

If you retire at age 73 or later and try to roll over your entire 401(k) balance to an IRA in the same year, you’ll accidentally roll over the portion that should have been your RMD. That amount becomes an excess contribution in your IRA.


What Happens If You Roll Over an RMD by Mistake?

If an RMD is mistakenly rolled over to an IRA, the IRS considers it an excess IRA contribution. But there’s a solution—as long as you act quickly.

How to Fix It

You must remove the excess contribution, along with any earnings (or losses) on that amount—referred to as net income attributable (NIA)—by October 15 of the year following the rollover.

If done correctly, the IRS will waive the 6% excess contribution penalty.


Example: How This Plays Out

Tara, age 74, retires in 2025 and decides to roll over her full $400,000 401(k) balance to an IRA. She qualifies for the still-working exception, so she thinks her RBD is April 1, 2026.

However, her first RMD is actually for 2025, the year she retired. Let’s say her RMD for 2025 is $15,000.

By rolling over the entire $400,000, Tara unintentionally rolled over an ineligible $15,000. This amount is now considered an excess contribution.

Solution: Tara can avoid penalties if she:

  • Withdraws the $15,000,
  • Also withdraws the associated NIA, and
  • Does so by October 15, 2026.

Can You Avoid the RMD in the Year of Retirement?

Yes—but only with careful planning.

You can avoid triggering the RMD during your retirement year by leaving your 401(k) funds in the plan until the following year.

Then, in the next calendar year:

  1. Take the RMD for the retirement year,
  2. Take the RMD for the current year,
  3. Roll over the remaining balance.

While this strategy avoids rolling over an RMD by mistake, it creates a double RMD burden the following year, which could increase your taxable income and possibly push you into a higher tax bracket.


Best Practices for Rolling Over a 401(k) After Retirement

  • Calculate your RMD for the year of retirement before initiating a rollover.
  • Take the RMD directly from the 401(k) plan first.
  • Only roll over the remaining balance to your IRA.
  • Work with a tax advisor or retirement specialist to ensure accuracy.
  • If you mistakenly roll over an RMD, correct it by October 15 of the following year.

FAQ: 401(k) RMDs in the Year of Retirement

Do I have to take an RMD if I retire at age 73?
Yes. If you retire in the year you turn 73 or later, you must take an RMD for that year—even if your required beginning date is in the next year.

Can I roll over my full 401(k) balance after retiring at 73?
No. You must first take the RMD for the year you retire. Only the remaining balance is eligible for rollover to an IRA.

What happens if I roll over an RMD by mistake?
The IRS treats it as an excess IRA contribution. You can correct the mistake by removing the excess and related earnings by October 15 of the following year.

How do I avoid taking two RMDs in one year?
Take your retirement-year RMD before rolling over, or delay the rollover and accept that you’ll need to take two RMDs the next year.

What is the deadline to fix an excess rollover?
You must remove the excess contribution and earnings by October 15 of the year after the mistake occurred to avoid penalties.


Plan With Confidence


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Source: Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.
Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 04/29/24, with permission. https://irahelp.com/slottreport/401k-rmds-in-the-year-of-retirement/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
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