Sam (owner) has an IRA and a 401(k). Sam's DOB is 5/21/1937. He will be 70 1/2 on Nov. 21, 2007.
During early 2007 (say January) he rolled his IRA over to the 401(k) plan. This rollover occurred prior to his turning 70 1/2. No RMD was done from the IRA.

To calculate his RMD for 2007 his 12/31/2006 balance would be used. Do I need to use his IRA balance as of 12/31/2006 to calculate even though it wasn't part of the 401(k) at that time?

Thanks

He didn't take a RMD from the IRA before rolling? I think he should have. If he didn't, then I think that part of the rollover was ineligible. The fix would be to include the 12/31/06 IRA balance in the calcs.

He didn't take an RMD before rolling it over because he wasn't 70 1/2 at the time he rolled it over. Has he found a loophole in the system?

The first distribution taken in a year IN WHICH you turn age 70 1/2 is considered an RMD.

The amount of the RMD would be considered an inneligible Rollover. Must be removed unless he can consider it a contribution for Profit Sharing Purposes. Is Sam a self-employed owner? Can the excess rollover be considered a plan contribution?

Isn't his 1st RMD due by April of 2008, not 12/31/2007?

Yes, That's the RBD but the distribution is for 2007.

SEE the following: 1.408-8 Q & A 10.4

10.4 Q-4. What portion of a distribution from an IRA is not eligible for rollover because the amount is a required minimum distribution?
A-4. The portion of a distribution that is a required minimum distribution from an IRA and thus not eligible for rollover is determined in the same manner as provided in A-7 of §1.402©-2 for distributions from qualified plans. For example, if a minimum distribution is required under section 401(a)(9) for a calendar year, an amount distributed during a calendar year from an IRA is treated as a required minimum distribution under section 401(a)(9) to the extent that the total required minimum distribution for the year under section 401(a)(9) for that IRA has not been satisfied. This requirement may be satisfied by a distribution from the IRA or, as permitted under A-9 of this section, from another IRA.

Full Regulations Here:

Regulations

His first RMD is due 12/31/2007, year the individual reaches age 70 ½. He gets an extension for the first RMD year, which allows him to satisfy the RMD by April 1, 2008. But as noted earlier, if he takes any distribution in 2007, then that amount is considered part of the RMD and not rollover ineligible. In other words, if he distributes any amount in 2007- up to the RMD amount, he has given up the right to defer withdrawing the RMD amount withdrawn until the following year.

Great job providing that information, jevd. Some form of this question seems to come up each year with our clients.
Here's how we explain it: as of January 1 each year they should determine if any employees will be 70-1/2 or older at any time during that calendar year, then they should require if such employee wants to take a distribution to take the RMD before being able to rollover their account balance. Satisfy the RMD in the initial distribution for the year.

I agree, in this situation, the IRA should not have rolled over the entire account, but should have paid the RMD first.