Q: Are there any tax consequences if my grandmother, who is 81 and recently retired, rolls over her 401(k) into an IRA? She has been told she needs to do something with the money in her 401(k) and was going to roll it into an IRA. She wants to know how she will be taxed.
A: When a taxpayer rolls over funds from a retirement plan at work to a traditional IRA there is no tax consequence as long as the funds flow from one trustee to the other trustee or if the taxpayer actually receives the funds and re-deposits the gross amount withdrawn before any tax withholding into an IRA within 60 days from distribution of the funds.
Assuming the 401(k) is with the employer from which she just retired, there has not been a need to take a minimum required distribution (MRD) until now. As your grandmother is past age 70 1/2 and just retired, she is required to an MRD from her plan. An MRD cannot be rolled over. She should first have the retirement plan issue her the MRD and then have the plan administrator transfer the balance to her IRA account. The MRD is taxable income.
These questions are actual inquiries submitted by taxpayers to our AARP Tax-Aide Program. The AARP Tax-Aide Program is a volunteer-run, free tax-preparation and assistance program offered to low- and middle-income taxpayers with special attention to those age 60 and older. Our volunteers are trained and IRS-certified to understand individual federal-tax issues. Our volunteers provide tax assistance as a public service and cannot guarantee the accuracy of the information provided.