RMD from 401k and IRA

[mshine]

We have a client who has a 401k and an IRA and has been taking the RMD from the IRA only. It is our understanding that this is not correct and the RMDs should be taken from each account separately. Is that correct, and should we amend previous year's returns, or just correct this going forward? We found this error when reviewing the distributions for this year. The RMD was taken completely from the IRA and we plan to advise the client to roll funds back in and take the 401k portion from the 401k plan. The client was not aware of this rule and his financial advisors and the plan did not educate him on this issue. What is the best plan of action?

[Roland Slugg]

Is that correct?

Probably, but not necessarily. The RMD rules for IRAs and 401(k) plans are not quite the same.

If your client is over 70½ and has retired, then yes, you are correct. If he has not retired, however, no RMD is required from the 401(k) plan unless the plan document requires one.

Assuming he was, indeed, required to take distributions from his 401(k) but has not been doing so, this is what I would advise him if he were my client:

If it's not too late to return the excess amount he withdrew from his IRA this year ... i.e, he is within the 60-day rollover period, and he has not made any other rollovers this year ... return the excess to his IRA within the 60-day time limit and take an RMD from his 401(k). If it's too late to return funds to his IRA, he should consider taking his 2017 RMD from his 401(k) anyway, but he may wish to not do that, risking the 10% penalty but hoping to get that penalty abated.

Regarding prior years, advise him that he should have taken RMDs, and the IRS may write to him proposing a penalty for 2016, 2015 and/or 2014, and that he is even at risk for penalties for the years 2013, 2012 and 2011 if the 401(k) RMD not taken in any of those years was high enough that the 6-year SOL applies. At the same time, I would advise him that the IRS is usually very lenient regarding these particular penalties, but that no leniency or abatement of possible penalties can be guaranteed. I would speculate that in view of his taking enough from his IRA to satisfy the RMD for both his plans ... IRA and 401(k) ... that the IRS would likely waive any possible penalties.

I would put my advice in writing. Otherwise the client might later say you told him there would be no penalties, and want you to pay them.

[dtlee]

Roland,

I seem to recall that the Statute of Limitations for such a penalty does not begin until/unless Form 5329 was filed.

Are you saying that the IRS now considers a 1040 to be sufficient to begin the Statute of Limitations for such a penalty?

Thanks.

[New York Enrolled Agent]

Doug - I believe you are correct. See Paschall 137 TC 8


We hold that the filing of the Forms 1040 did not start the statute of limitations running for purposes of the section 4973 excise tax in the absence of accompanying Forms 5329. [citations omitted] ... Because Mr. Paschall failed to file Forms 5329 for the years in issue, respondent may assess the excise tax deficiencies at any time.