Fixing an RMD problem

[Snaggletooth]

Mis Quote Fiasco

Apologize to anyone who may have been misled. The quote itself was coupled with a response to yet another party and with a confusing portrayal of an antecedent was only made worse by my usage.

Slugg is right about 2009 as well. 2010 was NOT the Holiday, it was when all the problems surfaced and vast numbers of people missed their RMDs.

[Bees Knees]

However, the conscientious custodians will notify the TP of the RMD and advise if they do not hear otherwise, it will automatically be issued to him.

If an IRA custodian automatically distributed money to me because they did not hear from me as to whether or not I took my RMD for the year, they would be the subject of a lawsuit.

The real facts were:
a) Custodians shut off their RMD machinery in 2010 because of the stimulus and did not reactivate it for 2011.
b) Custodians did not want to be responsible for large IRS penalties.
c) Custodians could claim they didn't know about other accounts thus they had no responsibility to do anything.

And according to the law they DIDN'T have responsibility. But their inaction was hardly the customer service of your dreams.

I do not see your point that IRA custodians have some kind of moral obligation to call their customers and bug them about making sure they are fulfilling their tax obligations. Do YOU call all of your tax clients over age 70 at the end of December to make sure they took their RMD for the year? Do you call all of your tax clients who should be making estimated tax payments to make sure they are in fact remembering to pay their estimates?

It would be one thing if the rule stated RMD must come out of each IRA. But that is not the rule, and IRA custodians are fully fulfilling their obligations by telling the customer each year what their RMD is for that particular IRA.

[DonPriebe]

... IRA custodians are fully fulfilling their obligations by telling the customer each year what their RMD is for that particular IRA.

The custodial requirement is even less than that. IRA custodians only have an obligation to tell their clients THAT a RMD is required, but have no obligation to tell the client the amount of the RMD unless the client asks. The instructions for box 12b on the 5498 say ...

Box 12b. Shows the amount of the RMD for 2013. If box 11 is checked [showing that there IS a RMD] and there is no amount in this box, the trustee or issuer must provide you the amount or offer to calculate the amount in a separate statement by January 31, 2013.

Fidelity (for example) does not show the amount of any RMD but invites the client to call a representative to have the RMD calculated for their own personal situation.

[Burke]

All of the posters who are confirming the custodians' actual legal responsibility requirements are correct. However, my past experience has been the same as that which Snag posted; i.e, until recent years, it was the practice of many of the ones my clients have to notify them not only of the requirement of the RMD but also the amount on each contract. And they did send them automatically in prior years. My complaint was that the custodian WAS notified on both accounts to do auto-RMD's for each future year in the spring of 2012, and it only occurred on one. One of them was the spouse's IRA originally, which was transferred into the TP's name when the spouse died. Prior to his death, they were sending automatic RMD's to each. I spent 3 hours with her handling the paperwork at that time, along with all the death claim papers to this same insurance company, and on the phone with them to facilitate all the transactions. To have to do it all again on the phone (for 45 minutes) because they don't have anyone locally to take care of these things,(just a call "customer service" center in another state,) is not worth the time and effort of leaving it with them. I know I will go through the same rigamarole when she dies because their children are clients as well. Accomplished the same thing in person with her at her credit union across the street, and it was a piece of cake. Hence my advice.

[Nashville]

Never was a problem

I do not see your point that IRA custodians have some kind of moral obligation to call their customers and bug them about making sure they are fulfilling their tax obligations.

You probably know this is Ron J at another location with a different IP computer address.

The only way to clearly paint the picture is to ask if anyone remembers whether this was ever an issue prior to the 2009 RMD hibernation. Whether there was a legal or moral obligation was not an issue until 2010 when issuers did not reactivate RMDs after the 2009 hiatus.

Is it just me or does it seem like prior to 2009 our clients were receiving RMDs consistently, year after year, without the truculence that has occurred since then? I don't deny the legal responsibility issue, but I somehow don't recall the issue ever being raised. If the custodians were synch with the recipients in those years, then what happened?

[LCP]

My thought was that an approach to having the penalties waived was to take a cumulative (10 years' worth) distribution asap.

Back to the OP for a second..........what should I have the client do?

Take a distribution equivalent to the missed RMD for each open year? ..... just for 2012 in order to report the violation and ask forgiveness?? ..... just start with 2013 and see what happens???

[Bees Knees]

Is it just me or does it seem like prior to 2009 our clients were receiving RMDs consistently, year after year, without the truculence that has occurred since then? I don't deny the legal responsibility issue, but I somehow don't recall the issue ever being raised. If the custodians were synch with the recipients in those years, then what happened?

Well I understand your point if it is something along the line of an IRA that was set up to automatically distribute RMD each year to the recipient because that recipient authorized it to be set up that way, but then in 2009 somehow that auto withdrawal function stopped. But that is simply a matter of getting it re-started again by the recipient.

It is no different than having auto bill pay. Each month your phone bill is automatically deducted from your checking account. Then some fluke comes along that stops the auto pay, and the phone company starts sending you monthly bills once again demanding paper checks.

If the system was set up for auto whatever, and something causes that auto whatever to stop, the IRA recipient has to initiate the auto whatever to start all over again.

[Bees Knees]

Back to the OP for a second..........what should I have the client do?

Take a distribution equivalent to the missed RMD for each open year? ..... just for 2012 in order to report the violation and ask forgiveness?? ..... just start with 2013 and see what happens???

Nobody wants to answer your question because the correct answer is different than what most of us do in real life.

The correct answer is found on page 13-24 of TTB under the heading "Waiver of penalty" which basically means you tell the IRS you are subject to the 50% penalty but that you have taken such and such a step to correct that matter, so please forgive me and waive the penalty.

[LCP]

Nobody wants to answer your question because the correct answer is different than what most of us do in real life.

The correct answer is found on page 13-24 of TTB under the heading "Waiver of penalty" which basically means you tell the IRS you are subject to the 50% penalty but that you have taken such and such a step to correct that matter, so please forgive me and waive the penalty.

I see...... and there's no guidance for what the IRS's desired such and such a step is or should be?

[Bees Knees]

I see...... and there's no guidance for what the IRS's desired such and such a step is or should be?

Well, you can't go back in time. The only things you can do is take out now what should have been taken out in the past, plus earnings on those amounts that have been allowed to accumulate in the account.

[FEDUKE404]

Fixing the problem IS difficult

Nobody wants to answer your question because the correct answer is different than what most of us do in real life.

The correct answer is found on page 13-24 of TTB under the heading "Waiver of penalty" which basically means you tell the IRS you are subject to the 50% penalty but that you have taken such and such a step to correct that matter, so please forgive me and waive the penalty.

That IS technically the correct answer, but what is getting lost in the shuffle here is the fact that you would basically be needing to ask for the waiver of ten different penalties on ten calendar-year tax returns. (See my prior reference above to Part VIII of Form 5329.) I have no idea how you would address that multi-year aspect for the situation presented here.

I have had clients who messed up on RMDs, the penalty was calculated on the tax form for the relevant year(s), and then a waiver of that penalty for that year was requested listing the applicable facts, along with filing a 20xx Form 5329 and attaching a "mea culpa" statement. So far, knock on wood, the IRS has not chosen to "disagree." However, I feel sure there is a limited amount of times you can pull on Superman's (IRS) cape before a less favorable end result occurs.

Another thing which is not being addressed is that the RMDs for the years involved are not a constant ("each year") dollar amount. Far from it. For an account with nothing but CDs in it, the year-end value would be about the same, and slightly increase since there were apparently no withdrawals. For an aggressive stock retirement account with year-end asset values all over the place, the calculated RMD amounts for each missing year would vary greatly (check the DJIA from 2008 through 2012) as the RMD for each of those years would then be based on wildly fluctuating year-end asset values.

This is not a pretty scenario. While there may an IRS auditor out there who would consider the total facts, and present a compromise "no (significant) penalty" resolution, the rules are pretty much in existence to urge the folks looking at RMDs that it is in their best financial interest to take those when required.

It might help to note that the Form 5329 can be filed as a "stand-alone" signature form, but that is only appropriate in limited circumstances. (Avoiding forevermore using the "cite" word here, I would assume same would have to accompany a Form 1040X ??) You most likely would have to retrieve the actual Form 5329 for the each of the tax years involved, as the form has likely changed over recent years.

Good luck in resolving this matter.

FE

[FEDUKE404]

Differs from excess contributions issues

Well, you can't go back in time. The only things you can do is take out now what should have been taken out in the past, plus earnings on those amounts that have been allowed to accumulate in the account.

It simply does not work that way....completely different from putting "too much" money into an IRA account and then having to make amends to satisfy the IRS gods by taking out the "bad" money + earnings.

If there are ten year's worth of RMDs rattling around out there, then there are ten different RMD amounts (previously calculated, each year, based upon year-end account values).

In an ideal world, the client would provide you with the RMD number for each year, and that would be a good starting point. But to use the 2012 RMD and then multiply by ten is......wrong!

FE

[LCP]

That would only take care of the 2013 RMD.

....and likely also create one heck of a tax burden at the same time!

Take a look at Part VIII (especially line 53) of Form 5329. That 50% penalty, in one form or another, would have been applicable for each and every year the RMD for that tax year was not taken.

FE

Ouch...... 50% of the RMD that should have been taken 10 years ago, and then 50% of the 50% that was left, and then 50% of the 25% that was left, and then 50% of the 12.5% that was left etc, etc....... [repeat the above for the Year 9 RMD] etc etc .... !?!?!?!?

That being the case there is some penalty hanging out there for every year without regard to any statute of limitations. Fortunately it would get smaller each year.,... or would it?

[Bees Knees]

It simply does not work that way....If there are ten year's worth of RMDs rattling around out there, then there are ten different RMD amounts (previously calculated, each year, based upon year-end account values).

Well, it simply does work that way. If there are 10 different RMDs, then the total of those plus earnings need to be distributed in the current year.

What part of that did I not imply in my previous post?

It is entirely possible that the total of all RMDs for 10 years, plus earnings, exceeds the current value of the IRA. If so, the entire thing needs to come out.

[mastertaxguy]

RMD is calculated for ALL IRA's regardless of from where it is taken..

Relatively new client brings in an IRA statement and says, "I forgot to take an RMD out of this one. "

He's about 80. How would you determine the amount he should have taken out over the last ten years and then deal with the situation? I'm sure that there were a few years in which he took enough money out of his other plans by accident.

What did client mean when he said "....out of this one"?

RMD is calcuated for all IRA's a taxpayer has, as has been noted previously. However, the entire amount of Required Minimum distibutions can be taken from one IRA or spread out amont all IRA's a taxpayer may have.