Tax client apparently converted a 401k to a qualified annuity thru their local bank some years ago and bank and TP only became aware that RMD should have commenced in tax year 2005. Any suggestions on how to bring this up to date with IRS? This being my first post after following this forum for several years, any feedback will be very much appreciated.
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Have them contact the annuity company and notify them of the mistake. They will take care of it for them immediately.
For the IRS, I'd wait to see how the annuity company handles it. -
If I remember correctly, now all you have to worry about is the 50% penalty. Do I remember that correctly, i don't normally run into this. Last time was n 1993 or so.Comment
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How could this be missed? Did the annuity company have the wrong birthdate on file?Comment
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They did WHAT??
Gary2 raised exactly the same question I had.Originally posted by Gary2 View Post
SOMEONE dropped the ball ("bank and TP only became aware that RMD should have commenced in tax year 2005") and it will not be a pleasant experience to resolve.
If XCLL82 was involved in prior year tax returns, those 50% penalties can be a bummer all around.
Good luck on this one.....
FEComment
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Bank sold TP annuity and only became aware of situation when TP went in to renew a CD held in same. TP is not very knowledgeable of tax ramifications of these products and I was completely unaware of any annuity existing. Bank officer called me asking for my advice concerning same and is now researching their next move.Comment
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Seems to me there are several people/entities who should have known about the TP's RMD ... the trustee, the tax preparer and the TP himself, and perhaps even a separate financial planner/adviser. For several years IRA trustees have been required to advise IRA owners of their RMD, but they are not required to actually distribute the RMD or any other amount unless and until requested to do so. It's very likely that the trustee did send those letters each year, and if that is so, then the responsibility rests with the taxpayer.
Those letters, though, may not be clear or seem important to some elderly people, or they might assume that the RMD will be paid out to them automatically. It's a troublesome issue, and in cases where there is a legitimate failure due to lack of understanding, it's one where the 50% penalty is way, WAY too harsh.
Regardless of where the blame may fall, I believe it is a good idea for each tax preparer to advise/remind every one of his "RMD-mandatory" clients of this obligation, each year, and to do it in writing.Roland Slugg
"I do what I can."Comment
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To expand on this a bit, the trustee must notify the IRA owner of his obligation to take a required minimum distribution, but does not have to calculate the amount of the RMD unless requested to do so by the owner. And the trustee could not possibly know the actual RMD required by the owner since the trustee has no knowledge of how many other IRA accounts the owner has. And of course the owner has no obligation to take any portion of his RMD out of any specific account.... For several years IRA trustees have been required to advise IRA owners of their RMD, but they are not required to actually distribute the RMD or any other amount unless and until requested to do so. It's very likely that the trustee did send those letters each year, and if that is so, then the responsibility rests with the taxpayer. ...Comment
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Disagree
You are correct that the total amount of RMDs a taxpayer takes for a calendar year may be distributed among any/all of such qualifying accounts.Originally posted by DonPriebe View Post
But every RMD notice I have ever seen does tell the owner of the account the exact amount of the RMD that, at least in theory and absent other unknown facts, should be withdrawn from the account in question. Such notices are usually sent early in the calendar year and contain verbiage along the lines of "By 12/31/20xx you are required to take a required mininum distribution of $789.01 from this account" and then further explanatory matters attached. (Otherwise it would merely be a "distribution" notice instead of a "required minimum distribution" notice.)
FEComment
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From the instructions for Form 1099-R/5498, p 16... but every RMD notice I have ever seen does tell the owner of the account the exact amount of the RMD that, at least in theory and absent other unknown facts, should be withdrawn from the account in question. Such notices are usually sent early in the calendar year and contain verbiage along the lines of "By 12/31/20xx you are required to take a required mininum distribution of $789.01 from this account" and then further explanatory matters attached. (Otherwise it would merely be a "distribution" notice instead of a "required minimum distribution" notice.)
From my personal experience, Fidelity, Vanguard, and at least one local bank use the "we'll tell you if you ask" method.Alternative two. Under this method, the statement informs the participant that a minimum distribution with respect to the IRA is required for the calendar year and the date by which such amount must be distributed. You must include an offer to furnish the participant with a calculation of the amount of the RMD if requested by the participant.
See www.w2in.com/data/Fid_5498.pdf for a copy of a Fidelity 5498 RMD Notice.Comment
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Is there any possibilty that he has been taking distributions from other accounts? If he has, and he has taken more than required in any year, it could possibly cover the RMD from this account in question.You have the right to remain silent. Anything you say will be misquoted, then used against you.Comment
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Notices vary
I'm not in a position to agree or disagree with you. Quite frankly, the more logical approach is the "let us discuss it with you" approach which does involve some client action.Originally posted by DonPriebe View Post
Of course, what you presented was apparently from the Form 5498. All of the client notices I recall seeing were account-specific notices, showing a dollar/cents amount.
I took a quick look at the current Form 5498 ( http://www.irs.gov/pub/irs-pdf/f5498.pdf ) and this whole discussion may soon become moot....look at boxes 11 & 12.
As for your original comment: Many of my clients have qualifying retirement accounts (usually CDs etc) with the various credit unions in the area. I know for a fact they "automatically" receive a notice (perhaps accompanying a Form 5498??), at some point during the year, as to the actual amounts that must be withdrawn. Others do have accounts with national brokerage firms, but I don't recall ever seeing a general notice such as the one you provided. Perhaps the client did receive such, and then followed up on it unbeknownst to me?
The biggest problem I had was with a client whose RMD notice was merely a "footnote" to her regular monthly bank statement. Those statements were rarely reviewed, and it was not until the following calendar year she became aware of the RMD issue. The other scenario that caused several clients problems was the optional "skip" from taking a RMD that was permissable a couple of years ago due to the bad economy et al.
No big whoop either way, as I'm sure the reporting rules for the investment firms/banks change regularly.
FEComment
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Maybe I'm reading too much into the word "annuity", or my limited experience with them is showing, but I always thought that when you purchased an annuity, even a variable annuity, that there was an upfront discussion of the when the payout would start. That's why I was incredulous at this being missed. It's not like a non-annuity IRA where you can juggle which one you use to satisfy the RMD. The annuity is part of the contract, and while there might be some choice about starting before 70 1/2, I didn't think there were any options to start the payout after 70 1/2.Comment
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