Sudden RMD Penalty Relief

[Snaggletooth]

There have been recent discussions about custodians not sending RMDs to recipients for 2010. Happened to one of my clients, and he called the custodian.

He was transferred to a "tax expert" (uh-oh) who works for the custodian.

All of sudden he is telling them the penalty does not apply if the custodian gets the 2010 RMD check to recipient by April 1, 2011, AND recipient includes the distribution in his 2010 return. (For many people this would involve filing an amended return)

Where on earth is he getting his information? Am I so ignorant that I have missed this exemption from the penalty?

Don't be shy -- if I've missed it, just tell me even though I may be every bit as ignorant as that. (If you don't like me to begin with, here's your golden opportunity.....)

[bgiez]

I had a client whose financial guy dropped the ball on the 2010 RMD and he told my client that he had until April 1 to get his 2010 RMD, but the client didn't mention anything to me about including the RMD on the 2010 return. When my client mentioned the April 1 date I didn't really pay any attention, figured someone (client or financial guy) was confused.

So I'm as ignorant as you are about this, Snags. Can someone enlighten us please?

[S T]

Well

Did this taxpayer turn 70.5 in 2010 ?

Normally RMD is by 12/31 - but year t/p turns 70.5 can be Jan1 to April 1 of the following year. and THEN a second RMD is due by 12/31 of the same year.

Here is an excerpt from Fidelity

How should I time my first MRD when it comes to taxes?
If you take your first MRD between January 1 and April 1 of the year after you turn 70½ , you still need to take your second MRD by December 31 of the same year. Since IRA and Keogh distributions are taxed as ordinary income, this may push you into a higher tax bracket. Also note that if you take your MRD between January 1 and April 1 of the year after you turn 70½ , your December 31 account balance is not reduced by the amount of the MRD taken for the first MRD when calculating the amount of your second MRD. So, be sure to plan your first withdrawal carefully

and

What are the deadlines for taking MRDs?
You may withdraw your annual MRD in one distribution or make withdrawals periodically throughout the year, but the total annual minimum amount must be withdrawn by the deadline of December 31 (except for your first MRD, as explained above).

Sandy

[bgiez]

Yeah, when he said April 1, I figured the financial guy was confusing the annual distribution with the first RMD which must be taken by April 1 in the year following the year in which you turn 70.5.

My client's first RMD after 70.5 was years ago. He had his RMD done automatically every November (he even took it in '09 when he didn't have to) then his account got transferred in September and his financial guy did not set the RMD up, even though my client has been using this financial guy for decades (although maybe that's the problem ).

I filed the 1040 a week ago, while we were waiting to find out how much the 2010 RMD should have been. We will file a 5329 separately with a request to waive the penalty due to reasonable cause.

[Edsel]

Taxable What Year

Assuming we can believe what is being told (and I've not seen any cites yet or even heard of such a thing), would a distribution for 2010 RMD made before 04/01/11 be taxable on the 2010 or 2011 tax return?

[ChEAr$]

Remember also that it is NOT the custodian's job to automatically make a distribution unless this scheme has been set up in advance. His job is simply to notify taxpayer that a RMD is required for the year and that based solely on amounts in his account with that custodian the RMD will be at least $xx,xxx.
There are clients who have IRA's at different institutions and decide each year from which one to take the RMD based on a total of all FMV's as of previous 12/31.

[Edsel]

Thanks but...

Thanks ChEAr$, but I don't think the custodian's responsibility is at question. What IS at question is this dogma about the custodian delaying the 2010 RMD penalty-free until April 1 of this year, and nobody seems to know of a regulation allowing this.

Maybe IRS is telling these giant banks and insurance companies if they do this they will grant a waiver of the penalty. No need to create yet another furor by the public against the big financial interests.

[Burke]

I don't know of a regulation either, but it seems I read somewhere the IRS is more forgiving than usual due to the suspension of RMD requirements in 2009, and there have been a lot of these missed in 2010 as a result. I do believe, however, it needs to be taken asap and reported on the 2010 return.

[bgiez]

I don't know of a regulation either, but it seems I read somewhere the IRS is more forgiving than usual due to the suspension of RMD requirements in 2009, and there have been a lot of these missed in 2010 as a result. I do believe, however, it needs to be taken asap and reported on the 2010 return.

Burke, are you saying that the RMD should be reported on the 2010 return even though not distributed until 2011 and there is no 1099R reporting it until 2011? Seems like a recipe for disaster to me.

[Davc]

Hopefully by reporting he means as a missed RMD with a waiver request.

[Burke]

Burke, are you saying that the RMD should be reported on the 2010 return even though not distributed until 2011 and there is no 1099R reporting it until 2011? Seems like a recipe for disaster to me.

Yes, and I know I just read this somewhere this week. Will try to find source. It was concerning the waiver of penalties if certain conditions were met. One was making the withdrawal as soon as possible after it was discovered (not 4/1) and claiming it on the tax return for the year in which it should have been reported.

[Snaggletooth]

Thanks to All

Thanks to everyone for their input. I believe I was correct because this abatement process is apparently not in the tax code or regs. Sounds like this is just an arrangement the IRS has worked out with various custodial parties to do damage control on what would certainly be an enraged public.

Looks like I will fill out the 5329, request abatement from the penalty, assure my clients have received their 2010 RMD, and then prepare an amended return for 2010. Although the penalty will probably be abated, clients will owe extra tax on their 2010 for a 1099-R they didn't get.

[dmj4]

Including on 2010

Where can I find that the RMD not taken in 2010, but taken in 2011, needs to be reported on 2010? I haven't seen that in my research. I am referring to the taxable distribution, not the penalty.

Thanks

[Burke]

I did find this: Pub 590, page 55. Request to waive the tax. "If the excess accumulation [insufficient distribution] is due to reasonable error, and you have taken, or are taking steps to remedy the insufficent distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of Tax in the Instructions for 5329." Note there is no mention of any date (as in 4/1) or that you should report it in the year in which it had been required. However, had it been done correctly, that is what would have happened and the tax would have been due on the 2010 return. I am basing that action on prior experience, in which this is what we did, and the IRS said no more about it. Frankly, I think under the circumstances, the IRS will probably waive any penalties in either case. But to me that satisfies the "taking steps to remedy the insufficient distribution" requirement by doing it the way it should have been done in the first place. No explanation required this year as return has not yet been filed, but next year will report gross 1099-R proceeds, and show taxable only 2011 distribution amount and will attach explanation.
That's my story, and I am sticking to it.

[Snaggletooth]

2011

A couple clients have told me that BOTH the 2010 and 2011 RMDs will appear on a 1099-R for 2011.