Fixing an RMD problem

[LCP]

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.

[Snaggletooth]

Custodian

The custodian should have already sent him his MRD for 2012 as well as a 1099-R. They can weasel out of the responsibility by claiming their client never told them to do it, but for all intents and purposes this is a cop-out. They just don't want to be liable to the participant in the event the IRS rings up a penalty. Virtually all custodians do this without prompting.

There are charts in TTB, p. 13-8. If there are no other factors, he should divide the balance on 12/31 of the previous year by 18.7 yrs. to determine the RMD (if he is 80 yrs old). The divisor may change if he needs to use a different chart.

[zeros]

What Would Happen?

What would happen if you just started taking the RMD and hope the IRS would not catch it? Could they miss it?

[LCP]

The custodian should have already sent him his MRD for 2012 as well as a 1099-R. They can weasel out of the responsibility by claiming their client never told them to do it, but for all intents and purposes this is a cop-out. They just don't want to be liable to the participant in the event the IRS rings up a penalty. Virtually all custodians do this without prompting.

I'm not sure I agree with you. Isn't it true that as long as you take the correct amount out in total you don't need to take an RMD from each IRA? If that's the case, the custodian shouldn't be concerned that nothing has been distributed from that account. His obligation would simply be to advise the participant of the rules each year.

[Burke]

Technically, you are right. 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. I just had a go-round with one major insurance company that told the TP that they did not do automatic RMD's unless they signed paperwork (or authorized over the phone) that this be done each year. It did not seem to matter that she had two with them, and they sent it on one, but not the other, and that they were instructed to do both last year in the spring. So we had to have them issue the RMD for 2012 in March 2013 as well as the 2013 RMD, plus set up for auto RMD's from now on. 45 minutes on the phone! I advised her to yank it out of there and put with her local credit union.

[Roland Slugg]

...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.

It would be highly improper for an IRA trustee to do that. IRA custodians can not make distributions on their own initiative. Only the IRA owner or beneficiary can do that. He/she can do so either by requesting a distribution or by setting up a recurring distribution request. Based on what was stated in the OP, I believe the IRA trustee/custodian acted properly.

Even though people have only one overall (traditional) IRA, the funds can be and often are divided into two or more different accounts. Many taxpayers take their RMD from just one of their accounts, or from some combination of two or more, and that is perfectly all right.

[FEDUKE404]

Perspectives on RMD responsibility options

Per the norm, Roland Slugg is spot on with his comments.

The IRA custodian has pretty much met his fiduciary obligation to advise the owner of the RMD amount from the specific account(s) under their control. In the absence of a signed document authorizing an "automatic" annual withdrawal from any account, it would not be a legal practice to withdraw/distribute funds from the account just to fulfill a calculated RMD dollar amount.

The account-holder bears a certain responsibility to be certain the proper RMD amounts (cumulative for all required accounts) are taken each year. As has been duly noted, the funds can come from any qualifying account.

Granted, by definition RMDs occur with folks in their seventies, so certain problems could arise just because of that client base. Having said that, it is pretty much just a cop out to (somehow) blame the custodian when the client did not take the proper RMDs.

Consider a reasonably close comparison: You prepare four estimated tax payment coupons for a client in early March. Do you call or write reminder letters prior to each of the four payment dates? Is it your responsibility if the client "forgets" to make the payments? Do you pay the underpayment penalties that are eventually assessed when the payments have not been made?

Oh well....back to work.....

FE

[LCP]

Thanks for all of the responses. For the record, neither I nor my client are trying to cop out of anything ...... and I realize that accusation wasn't directly made up above.

So how would you all fix this problem?

I am quite certain, based on general discussions with the client, that enough was taken out of other IRAs in some of the earlier years to satisfy the RMD rules.

[FEDUKE404]

Prior years actions irrelevant

Thanks for all of the responses. For the record, neither I nor my client are trying to cop out of anything ...... and I realize that accusation wasn't directly made up above.

So how would you all fix this problem?

I am quite certain, based on general discussions with the client, that enough was taken out of other IRAs in some of the earlier years to satisfy the RMD rules.

"Earlier years" is not a factor in any way, except for potential penalties for insufficient RMDs for each one of those "early" years.

The RMD for each account is re-calculated each year, based upon the value of the assets in the account and the age of the account owner.

It is neither a cumulative nor a running total.

FE

[Snaggletooth]

It would be highly improper for an IRA trustee to do that

In the context Mr Slugg refers to, "That" refers to notifying IRA holders of their responsibility to take RMDs.

And I disagree. They had no problem with this prior to 2010, and due to the stimulus, IRA holders were excused from taking
RMDs for that year. Most of the custodians my clients dealt with did not resume issuing RMDs for 2011 and several people
over 70 1/2 were faced with huge penalties for 2011. IRS fortunately rescinded these penalties upon request.

When confronted with this, these custodians claimed immunity because "the IRA holder could possibly have more than one
account and we didn't know what he wanted to do." This excuse was used even by custodians who had been issuing RMDs
to the same holder for YEARS.

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.

Trust me, the IRS would rather send out penalty notices to a million taxpayers any day of the week before coming down on the
politically influential banking and insurance industry.

[FEDUKE404]

Tough to blame the custodians here

I'm not sure that logic will hold very much water.

I have numerous clients who deal annually with RMD issues. When the (2010?) "holiday" was in play, many of them chose that option. Some did not, and just took their RMD(s) as they always had done.

But, to the best of my knowledge and through relevant discussions with those clients, they were quite aware the stoppage was NOT permanent and that after the "holiday" they would have to resume their RMD(s) as before.

Kinda tough to place very much blame on the custodians, regardless of what spin you apply. So far as I know, every custodian has continued to provide the account holder with proper notification of what their RMD(s) for the relevant calendar year would be.

FE

[Roberts]

Maybe the IRA custodians should just fill out the 1040 for clients. Since not knowing the financial ramifications for actions, not knowing the clients overall portfolio or their health means they should take it upon themselves to generate a tax liability for their customers, filling out the 1040 without knowing all the information just seems like the next logical step.

[LCP]

"Earlier years" is not a factor in any way, except for potential penalties for insufficient RMDs for each one of those "early" years.

The RMD for each account is re-calculated each year, based upon the value of the assets in the account and the age of the account owner.

It is neither a cumulative nor a running total.

FE

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

[Roland Slugg]

In the context Mr Slugg refers to, "That" refers to notifying IRA holders of their responsibility to take RMDs.

I wonder what percentage of people would read the opening line of my post above, along with the quoted sentence to which I referred, and conclude that I was saying it would be improper for IRA trustees to notify IRA owners of their RMD requirement. One in a hundred? One in a thousand? One in a million? No, Snag, "that" referred to an IRA trustee making a distribution the IRA owner (or bene) had not requested. The annual RMD notifications are mandatory.

And by the way, the "holiday" from an IRA's RMD was for the year 2009, not 2010.

[FEDUKE404]

Nope !

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

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