Inherited - Beneficiary IRA

[S T]

I was just notified due to a broker account merger and possibly the suspension of the 2009 RMD distributions, that a client DID NOT receive RMD on an inherited IRA from his sister.

First year beneficiary received RMD was for year 2008 - year he turned 70.5

RMD for account was overlooked by Brokerage Firm years 2009-2012

So trying to correct and do the make-up for years 2009-2012

Question - As 2009 RMD was suspended, now that we are calculating late RMD, do we have to include the amount for 2009?? Or I can skip 2009, and calculate only 2010-2012?

Thanks,

Sandy

[mactoolsix]

Skip 2009 as no RMD was required.

Be sure the past RMD's are taken prior to filing the 5329.

Be sure to claim "The client has made proper arrangements that this will never happen again."
Claim the fact that RMD's were not required in 2009, that the client was confused as to the required distributions.
Note the brokerage house slip up, and if they have several IRA's - all the better.
Were they on any medications, any history of confusion - claim it all.

I have done several of these and have never seen one rejected.

Mike

[FEDUKE404]

Need to deal with each tax year

Question - As 2009 RMD was suspended, now that we are calculating late RMD, do we have to include the amount for 2009?? Or I can skip 2009, and calculate only 2010-2012?

Thanks,

Sandy

There is not really anything such as a "late" RMD. The dollar amount of the RMD for each year would be calculated on the amount of funds within the account (as of the last day??) of that year. Among other reasons, in an up/down stock market the RMDs could vary greatly year-to-year. IIRC, there are tables where you find the applicable percentage, based upon the age of the recipient. You cannot now create a single RMD that would cover three (or four) years. While we're splitting hairs here, in theory you would need to calculate each annual RMD, based up value/age of recipients, and I suppose add those three numbers together and remove that amount, plus any 2013 RMD, during the current calendar year. Then everyone should be able to sleep better.

For 2009, there would be no RMD required. No harm, no foul. No Form 1040X.

For 2010, and 2011, and 2012 you would need to calculate three separate RMDs, and then proceed to Form 5329, Part VIII for each of those tax years. It's been a while since I did one with a 50% penalty issue being relevant, but I seem to recall you first calculate the penalty, then reverse/offset it via a waiver request. Such would involve a statement of facts, blah blah blah. From what I hear, the IRS is fairly lenient with granting a one-time waiver...especially since by the very nature of RMDs they are dealing with older folks.

I do not know whether you can use the same "excuse" for three separate years. Perhaps someone who has encountered that scenario can advise.

If you are lucky, you might avoid all RMD penalties, but the client will likely be looking at some significant 2013 "retirement income" shown on his tax return. That can muck up all kinds of things, to include if the 85% Soc Sec threshold was not normally reached, and if the guy is in high enough income his Medicare B/D premiums could even increase. (I haven't figured out any possible Obamacare surcharges yet.)

BTW: Why does there seem to be a continuing lack of "information" coming from the IRA account custodians? Are they that inept as for making a reasonable attempt to provide RMD rules/amounts to their clients??

Keep us posted as to your progress.

FE

[Roland Slugg]

The above responses provide good advice about what should be done now, and I would echo those suggestions. The only additional observation I would add is that since the IRA in question was an inherited IRA, then its RMD needs to be calculated on its FMV alone each year, and the annual distributions must be taken from this particular IRA. It can't be lumped in with the RMD for any other IRA the taxpayer may have.

But I'd like to address another issue. We read about someone's RMD failure all the time here. "My client didn't take his RMD for the past three years ... HELP!!" The blame is often placed on the bank, brokerage company or other trustee, and perhaps some of the responsibility does belong there. But I wonder. All my 70½ and older clients get written notices every year from each of their IRA trustees, but the trustee can only notify. Unless there is a standing instruction to distribute the RMD automatically, no IRA trustee can make a distribution on his own initiative. Doesn't the client have some responsibility here? Don't we?

For all my 70½+ clients I send them a written reminder every single year about their RMD. And when I prepare their returns, I look to see if it was received. For some of them I am even privy to enough information so I can tell if they took the right amount, but even when I don't know their exact IRA value, I usually have a reasonable idea of how much they should have received based on past years. Doesn't every conscientiousness tax adviser and preparer do this? Shouldn't we?

So when I read yet another case like this, blaming the broker, as usual, my first reaction is, "Well, where were YOU?"

Yes, I realize that some of these cases we read about emanate from new clients, and perhaps that's the case in this particular instance. But when it happens to an existing client, it isn't always somebody else's fault.

[Burke]

I think we have a responsibility to ask the question concerning RMD's for clients over the minimum RMD age when the tax return is prepared just as we should be asking about any other income during the prior year. It's a great gesture and service to notify them annually prior to year end, but not the preparer's responsibility under the law. Could setting a precedent, however, bring possible liability into play? What happens if they depend on this notice and it doesn't happen for whatever reason? Do the custodians have this problem?

[S T]

Thanks for the posts, Finally have resolve for the t/p -

The custodian will be making the "missed RMD's" due to the changeover in the merging of Companies, Custodian has provided t/p with a letter for the penalty waiver, Custodian will make the RMD for 2013 current, as well as a separate check for the "missed RMD's"
Client is now notified about a small account, that he thought was already paid out as an inheritance

And I can resolve all on the 2013 Tax Return, and deal with the required "Waivers of penalty" form 5329 for the "missed" distributions, prior years,
and for future have been authorized to discuss with the Custodian to hopefully ensure, no future missed RMD's.

Sandy

[FEDUKE404]

A reasonable solution

Thanks for the posts, Finally have resolve for the t/p -

The custodian will be making the "missed RMD's" due to the changeover in the merging of Companies, Custodian has provided t/p with a letter for the penalty waiver, Custodian will make the RMD for 2013 current, as well as a separate check for the "missed RMD's"

Client is now notified about a small account, that he thought was already paid out as an inheritance

And I can resolve all on the 2013 Tax Return, and deal with the required "Waivers of penalty" form 5329 for the "missed" distributions, prior years, and for future have been authorized to discuss with the Custodian to hopefully ensure, no future missed RMD's.

Sandy

Sounds like a reasonable and correct solution. I hope the Custodian's "mea culpa" will fly with the IRS for the problem years. In the past I've only had to deal with a short-term/one-year "oops, I forgot! but I have a good reason and have since remedied it" situation. Client might have a much steeper hill to ascend here due to multiple years.

In the absence of any information about your clients' other income and/or the size of the multi-year distribution that will obviously all be 2013 income, you may need to prepare your client for some surprises for his 2013 tax return. Aside from perhaps moving to a higher tax bracket, he could also face some taxable Soc Sec surprises, removal of allowable medical expenses, and even some Obama gotchas. Some hasty year-end planning might be needed to ease his pain?? And then there also lurks, separately, the potential increase in Medicare premiums for client plus spouse.

FE