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Correcting a TIAA RMD Rollover

A client came recently with a TIAA 403(b) and traditional IRA seeking help correcting a TIAA RMD rollover mistake. For a number of years, the client had been able to roll taxable distributions from TIAA into the IRA. Each distribution contained both an RMD which the client took and a regular amount which was eligible for rollover. In 2021, TIAA continued the same practice, of rolling funds into the IRA, except this time TIAA rolled the entire amount into the IRA without separating the RMD.

The IRA custodian later alerted the client that the TIAA funds had been marked as a required minimum distribution (RMD). Then, my phone rang with the question on the other end, “How do we fix this?”

The IRA custodian told the client it was an impermissible rollover, and TIAA told the client that nothing needed to be done to correct the situation. The client tried several times to get a different resolution from TIAA, to no avail. TIAA even sent the client new paperwork indicating that to resolve the situation a new account would need to be opened. All this was very confusing to the client.

There are three issues at play here which needed to be resolved. First, an RMD from a 403(b) cannot be satisfied by an RMD from an IRA. Although RMDs from multiple IRAs can be aggregated from one account and likewise with 403(b) accounts, the two different types of retirement accounts cannot be aggregated.

Second, there may have been a failure to take an RMD from the 403(b) account, which triggers a 50% excise penalty. Third, given that an RMD was rolled into an IRA, there would be a smaller excess contribution penalty.

In trying to find the best course of action to deal with TIAA, I did some generic web searching. It amazed me that so many people were having the same problem, but no one was offering a solution. The client, IRA custodian and myself had a few phone conferences and did not seem to be any closer to a resolution. Then, the client had a lengthy conversation with TIAA and received a promise of a letter that would explain the situation and could be used to mitigate penalties.

Once the letter arrived, it was not as TIAA described it would be. We were all frustrated, and I set the letter aside. The next day, I picked up the letter again and decided to do more sleuthing. TIAA has a FAQ page which provides much the same information as in the letter, but the FAQ related to the account holder turning 72. Laying the FAQ and letter side by side and confirming the client’s age, a resolution was finally found.

We had all assumed that TIAA initiated RMDs when the client turned 70 ½ and that the practice would continue without interruption. However, TIAA’s FAQ and letter to the client stated that a new contract is created when the account holder turns 72, and the entire distribution becomes an RMD.

Armed with this information, we determined that the 2021 rollover from TIAA into the IRA was entirely impermissible because it all represented an RMD. The IRA custodian distributed the funds to the client to correct the excess contribution. Going forward, TIAA has been instructed to distribute funds to a taxable account (non-retirement), and this will prevent future problems.

Once issues such as this are resolved – excess contributions and failure to take RMD – you must still file the appropriate forms with your tax return to report the excess contribution or failure to take an RMD along with the resolving transaction. It is tempting to think that nothing needs to be done since you would qualify for relief from the penalties anyway. However, the IRS has successfully pursued failure to file arguments against taxpayers in the U.S. Tax Court related just to excess contributions and failures to take RMDs. Do not omit the required tax forms even if you do not owe any additional tax! It is to your benefit to timely report because you start the statute of limitations running, and after three years, the IRS is barred from examining the transaction, unless they can prove fraud or substantial underreporting.

I hope this explanation is helpful. Again, I found many similar posts on community boards across the web about correcting a TIAA RMD rollover, but almost all of them went unanswered.