Fixing an RMD problem

[Snaggletooth]

What caused it all

was the hiatus of 2009 created as part of the stimulus.

Make no mistake about it. Congress did NOT survey the plight of the general population over 70 1/2 and decide that all of those people were in need of a one-year tax break and legislate this thing to help those people. It was instead part of a strategy to allow the big banks and insurance companies to hold on to their money. Another part of their "too big to fail" strategy.

Had the 2009 hibernation not occurred, there would not have been so many incidents of people NOT receiving their 2010 RMDs. Several of my clients had this happen - many of them who had never had any previous problems with RMDs, and were furious at the very thought that the RMD failure was somehow THEIR FAULT and not that of the custodian. To them, the penalty was just another way for the govt and the "too big to fail" crowd to gang up and make THEM pay for yet another govt boondoggle.

Wrote several letters that year, and was informed that the incidents of this failure numered well over 1 million taxpayers. The IRS was wholesale approving requests from the penalty exemption. Had they not done this, there would have been unbelievable political fallout from citizens who felt they were being beat up by yet another govt screwup.

Not only that, but had the IRS not excused the penalty, guess where the money would have come from to pay the penalty? Yep - most of these people would have just taken the 50% out of their IRAs to pay it. Thus the big banks and insurance companies would have lost half of their stimulus which allowed them to hold onto the money in the first place.

Politics and money talks, folks. And is at the root of much of what we do. Don't ever forget it...

[LCP]

I'm tired of the "you said...I said...I did not say" arguments that now seem to be more much prevalent here.

Regardless of what spin you do or do not wish to put on things:

For each account, for each tax year, a RMD amount was/is calculated.

The RMD amount, from year A to year B to year C, can vary considerably. The RMD is based upon the a) value of assets in the account on a specific date and b) age of the owner.

Failure to remove the RMD, for a specific year, results in a potential tax penalty, for a specific tax year, of 50% for the amount of the amount not withdrawn. Yes, that is why Form 5329 is necessary....it is *****NOT***** per account!!!!!!!!!!!!!!!!!!!!!!!!!!!!

This penalty is calculated on Form 5329. It is a tax penalty instead of an account adjustment consideration....and is definitely not a "you can make this tax penalty go away by taking MORE out next year" scenario.

The 50% penalty has nothing, zilch, nada, not a da*n thing, directly to do with removing assets from the relevant account. It is NOT (need I re-repeat myself?) something that can be "repaired" like an excess contribution to a Roth IRA account.

I hope the original poster now has enough facts to resolve the matter. An understanding IRS person could become a critical factor.

But if you're going to post "facts" on these boards....well....

Maybe this is the time to cite the cite of "don't need no steenking cite!!!"

Adios. I am out of here. Tax season is over.

FE

Thanks for this (particularly clear and helpful) post and your others. I hope that my inability to understand all of the concepts or inability to clearly communicate what I did understand weren't the primary cause of your frustration.

[LCP]

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.

Right..... but client didn't understand that when he made the statement.

[FEDUKE404]

Final post here

I'm tired of the "you said...I said...I did not say" arguments that now seem to be more much prevalent here.

Regardless of what spin you do or do not wish to put on things:

For each account, for each tax year, a RMD amount was/is calculated.

The RMD amount, from year A to year B to year C, can vary considerably. The RMD is based upon the a) value of assets in the account on a specific date and b) age of the owner.

Failure to remove the RMD, for a specific year, results in a potential tax penalty, for a specific tax year, of 50% for the amount of the amount not withdrawn. Yes, that is why Form 5329 is necessary....it is *****NOT***** per account!!!!!!!!!!!!!!!!!!!!!!!!!!!!

This penalty is calculated on Form 5329. It is a tax penalty instead of an account adjustment consideration....and is definitely not a "you can make this tax penalty go away by taking MORE out next year" scenario.

The 50% penalty has nothing, zilch, nada, not a da*n thing, directly to do with removing assets from the relevant account. It is NOT (need I re-repeat myself?) something that can be "repaired" like an excess contribution to a Roth IRA account.

I hope the original poster now has enough facts to resolve the matter. An understanding IRS person could become a critical factor.

But if you're going to post "facts" on these boards....well....

Maybe this is the time to cite the cite of "don't need no steenking cite!!!"

Adios. I am out of here. Tax season is over.

FE

[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.

[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.

[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?

[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

[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

[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.

[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]

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.

[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.

[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???

[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?