Required Minimum Distribution from IRA (RMD)

[Bees Knees]

A client only has one IRA. It is an annuity that was set up by an investment representative for a local bank. The client was 84 years old when it was set up, and this investment representative knew at the time it was her only IRA. About two years later a new representative for the same bank tells the client that she didn’t take out enough RMD for 2010. Her 50% penalty for not taking enough RMD equals $6,000 for 2010. When asked why the IRA didn’t distribute enough RMD, the new bank investment representative said it isn’t their job to figure that out, since the client could have other IRAs. It is the tax preparer’s responsibility to make sure everyone is taking enough RMD for the year.

How many of you check RMD calculations for your clients? Did you know (according to this bank rep) that it is the tax preparer’s responsibility to make sure a client is taking out enough RMD?

[S T]

Tax Preparer's responsibility

I never thought it was the Tax Preparer's repsonsibililty to make sure that the RMD was distributed or calculated - I do it as a service to my Long time Clients as a cross check to make sure that they receive the RMD each year, usually multiple accounts and to determine where to distribute the $$ from. I have the taxpayer sign a form that states the RMD it is based on the information provided and if the calculations are not accurate, the taxpayer is responsible for any penalties and interest.

I guess another question is - Is it the responsibility of the Financial Institution where the IRA is on deposit - for them to notify the Client of the RMD (just on the accounts that they hold or the information that they have on file) ??? Some Institutions do provide this information based on that Institution Account Knowledge, then some do not

Is it not the ultimate responsibility of the Taxpayer to make sure they recieve the RMD based on all of their "subject Retirement Accounts"?

From a post on Ed Slott's IRA Help

Who is Responsible for Calculating RMD Amounts?
Financial institutions that serve as custodians or trustees for IRAs are required to notify IRA owners of their RMD obligations, providing the financial institution held the IRA as of December 31 of the preceding year and the IRA owner was alive at the beginning of the year. The notification should either include the calculated RMD amount, or an offer to calculate the RMD upon request. This requirement does not apply to Roth IRAs or inherited IRAs.

Conclusion
Failure to withdraw the RMD amount will result in the IRA owner owing the IRS an excess accumulation penalty of 50% of the shortfall. Even in instances where the calculations are provided by the custodian, missing or inaccurate information can result in inaccurate calculations. The ultimate responsibility for ensuring the RMD is satisfied rests with the IRA owner. IRA owners should therefore double check calculations by working with a tax or financial professional proficient in the area of RMDs, or use reliably accurate software such as those provided by www.72t.net.

From T Row Price website

For qualified employer plans, the employer is responsible for determining the RMD amount and assuring that the RMD is distributed from the plan. For IRAs and 403(b) plans, the account owner is responsible for calculating and taking RMDs. Regardless of who is responsible for calculations, the taxpayer is responsible for any penalties.

Some thoughts,

Sandy

[Bees Knees]

As it turns out, the RMD was satisfied. Different rules apply for annuities under Treasury Regulation 1.401(a)(9)-6. You can't use the prior year account balance when calculating RMD for an annuity that has been annuitized.

The bank didn't know what they were talking about.

[oceanlovin'ea]

Here is another scenario that happened to one of my clients this year.

He had IRA's in 2 different institutions. Bank A and Bank B. Bank B was new account set up in 2009 and Bank A was an older IRA. Both made RDM's for 2009. But in January of 2010 when the CD in Bank B was up for renewal he closed out that account and took the money to Bank A.
In December Bank A made RDM based on balance at end of 2009. Bank B had no balance anymore so it made no RDM.
He got a letter from Bank A stating what the RDM would be for 2011, It was so much more than 2010 he went to check and we discovered the mistake.
Who do you blame? Bank A....they base it on end of 2009. Bank B - no account any more. The taxpayer - 90 years old and has always been notified by bank of RDM.

This has to be corrected.

Linda, EA

[Burke]

I just had a case where the TP withdrew her IRA account from one bank and rolled it over to another bank in 2009. The old bank made the RMD for that year prior to terminating the account, even though this was in the spring. They told her they had to do this when an account was terminated. So she kept the current year RMD distribution amount and rolled over the second check for the balance to the new bank. I suppose this was the bank's rule, as I know of no IRS rule which would have required it. And perhaps they did this to avoid just the situation you describe. IMO, however, she could have rolled over both amounts at that time, and taken the RMD from the new bank where all her money was at the end of the year. Correct? All this came up because she did not report the distribution amt -- she told me she had rolled it over. Then, too, 2009 legislation suspended RMD's, so she didn't need to take anything at all!

[Nashville]

No One's Responsibility

Did you know (according to this bank rep) that it is the tax preparer’s responsibility to make sure a client is taking out enough RMD?

Doesn't surprise me that this is the bank rep's version of "Whose Dog Is It Charlie Brown?" There were a number of 2010 failures discussed on this message board (one of them mine), and we heard every excuse known to man. "Why didn't you let us know you wanted a RMD - it's YOUR responsibility." "How can OUR bank know how many IRAs you have and how you want to allocate the RMDs among them?"

Pure fact of the matter is these giant institutions disabled their RMD machinery because of the one-year hiatus in 2009 and then didn't put Humpty back together again. We know this to be the case because of the RMDs that were never missed in 2008, 2007, 2006, etc. and then suddenly it's not their responsibility in 2010.

[JG EA]

As ST pointed out, it is the IRA custodian that has to notify the client of the amount of the RMD and it is the client's responsibility to actually withdraw it. It is not the tax preparer's responsibility, but it is a good idea to ask each year if this was done and do the calculations for them if they request it. But certainly not our responsibility. Plus it makes a lot more work for us if it isn't done, so a good idea to be on top of it.

I had one where the client tried and tried to get his wife's IRA closed - he was her legal guardian - and they stalled and stalled, required more paper work, then said they needed all the paper work again because the ones he did were outdated. I wrote all this as an explanation on the 5329 section as to why the RMD wasn't taken - because he tried to close it from around July on. (Finally did close in 2011 after the banker got on their case.)

[FEDUKE404]

Agreed

As cold as it may seem, the banks/brokerage firms no longer "urge" a client to be sure the RMDs are made. In some defense of their position, the client could fulfill the RMD requirements by using different accounts and/or banks. Apparently the banks, in most cases, now feel they have "done their duty" when they merely inform their clients, even if only in small print on a quarterly statement, what the RMD amount from the relevant account is.

A client recently received a notice from the IRS for failure to report an IRA distribution for 2009. The client received the funds in early December of 2009, then sent a cashier's check for the exact amount received and a cover letter via certified mail to the "big name" institution in mid-December. The tax return properly showed the "gross" amount received (consistent with the Form 1099-R), and then showed zero as the taxable amount due to the circumstances of the returned/unwanted RMD.

Whether a corrected/retracted Form 1099-R was ever issued is not quite clear....again even though it originated from a "big name" institution.

Plan A is to get more documentation from the institution to the IRS representative, and Plan B is for the client to send copies of everything to the IRS proving the erroneously paid funds were returned in a timely manner. Time will tell....

FE

[Gary2]

A client recently received a notice from the IRS for failure to report an IRA distribution for 2009. The client received the funds in early December of 2009, then sent a cashier's check for the exact amount received and a cover letter via certified mail to the "big name" institution in mid-December. The tax return properly showed the "gross" amount received (consistent with the Form 1099-R), and then showed zero as the taxable amount due to the circumstances of the returned/unwanted RMD.

Whether a corrected/retracted Form 1099-R was ever issued is not quite clear....again even though it originated from a "big name" institution.

Did the tax return identify the distribution as a rollover, or otherwise attach an explanation? I would have treated it as rollover, in the hope that it would be bureaucratically simplest, and least likely to trigger an IRS letter. How did the institution report it on the 5498?

[FEDUKE404]

Rollover and 5498 amount

Did the tax return identify the distribution as a rollover, or otherwise attach an explanation? I would have treated it as rollover, in the hope that it would be bureaucratically simplest, and least likely to trigger an IRS letter. How did the institution report it on the 5498?

While I see your point, it was not realistically a "rollover" but rather a "correction" and immediate return of all funds distributed to the institution.

As mentioned earlier, I do not know if a second Form 1099-R was ever issued. If it was, I have never seen it.

I do not have the relevant Form 5498 for 2009, but I would assume the RMD shown there was the calculated amount until the IRS modified the definition of "required" for calendar year 2009. Those documents are usually issued around May, and this erroneous distribution did not occur until early December of 2009.

The facts are clearly in favor of the client - it's just a matter of getting said facts to the proper IRS representative.

Thanks for your input.

FE

[ChEAr$]

As it turns out, the RMD was satisfied. Different rules apply for annuities under Treasury Regulation 1.401(a)(9)-6. You can't use the prior year account balance when calculating RMD for an annuity that has been annuitized.

The bank didn't know what they were talking about.

WHY am I not surprised? (grin