IRA Rollover

[geekgirldany]

Customer was contacted by investment company that she had an IRA and had to start RMD.Customer had forgot about the IRA. The company deducted around $1,500 finder fee because the customer's address had changed and they could not find her. So they hired a company to do it. They deducted this fee off her IRA. My customer's age is 74. So they had to be looking for awhile.

Customer's IRA was around $7000. She received a check for around $5500. She took the $5500 and put it into another IRA within 60 days. She received a 1099R from the Original Investment Company with the $7000 taxable with a code 7.

My question is can she rollover the entire $7,000 or will $1500 of it be taxable because of this finder fee? Like I said there was only $5500 rolled over into the New IRA.

Thank you guys for any help.

[OldJack]

The 1,500 is taxable. However, you have other more important issues with this. Your client was required to take minimum distributions since age 70½ and there is a 50% penalty of the RMD that she did not take. Such penalty is calculated and reported on form 5329, page 2, Part VIII. I would file form 5329 with the penalty calculated but not paid and request waiver do to reasonable cause.

[jainen]

I would ask

>>will $1500 of it be taxable because of this finder fee?<<

I would ask the company for a corrected 1099. Fees paid within the IRA simply reduce the amount available to withdraw, but she is still only taxed on the actual amount that comes out. Unless she met it from a different IRA, she can't roll over the RMD amount.

As OldJack explains, she has to deal with the issue of excess accumulations. She can ask IRS to waive the penalty, but don't get your hopes up because the law does not allow a reasonable cause defense for that penalty.

[OldJack]

She can ask IRS to waive the penalty, but don't get your hopes up because the law does not allow a reasonable cause defense for that penalty.

I have my hopes up for a client at the present time as I just filed form 5329 with a request for waiver as the required minimum distribution was 18 days late. My software has an input to request such waiver and prints the request with the form.

Required Distributions
.............
.............
Note. The IRS can waive this tax if you
can show that any shortfall in the
amount of withdrawals was due to
reasonable error and you are taking
appropriate steps to remedy the
shortfall. If you believe you qualify for
this relief, file Form 5329 and attach a
letter of explanation.

[geekgirldany]

Thank you guys. I thought there would be a RMD penalty but I just had not got there yet.

So I should tell the customer to call the old investment company to correct the 1009R showing the amount was rolled over? Or atleast $5000 of it?

It appears that she should have been taking the RMD since 2003. So there will be 4 years of RMD that she will be taxed on. RMD $255.75 x 4 = $1021. Does that sound correct?

Page 2 of Form 5329 says "Amounts Received in 2006". She really didn't receive amounts in 2006 for this because she rolled it over?

Geez my brain is tired.

[OldJack]

The correct required minimum distribution would be a different amount each year calculated on the previous years balance. However, if you took the lump sum balance and per the RMD chart for her age and calculate each years RMD you would have more than the required amount and that MUST be distributed if you expect to get a wavier of the 50% penalty. I don't think your client will like paying half of her lump sum for a penalty just to leave the amount in the roll-over account. And then, I am not sure but that each year you would still have the penalty for not correcting the account.

I believe you are looking at the wrong section of the form 5329. You start with line 50 and end with line 53.

[jainen]

apply the formula

>>RMD $255.75 x 4 = $1021<<

The 2003 RMD has been an excess accumulation for 4 years. The 2004 RMD has been an excess accumulation for 3 years. The 2005 RMD has been an excess accumulation for 2 years. The 2006 RMD has been an excess accumulation for 1 year.

The regs give two examples of the "reasonable error" that Old Jack referred to. They are erroneous advice from a plan advisor, and a miscalculation in a good-faith attempt to apply the formula.

[S T]

Rmd

RMD is calculated on the 12/31 balance at the end of each prior year and there is a different factor applied each year.

So to calculate the distribution you will have to have the 12/31 balance each prior year, apply the appropriate factor to determine the distribution and then apply the penalty for not distributing.

I would try to abate the penalty, but I don't know how successful you will be. I tried in 2004 when the broker forgot to distribute and we still haven't received.

If you have CFS Tax Tools, they have a module that will calculate for you the RMD each year.

Sandy

[ChEAr$]

no change in box 7

So I should tell the customer to call the old investment company to correct the 1009R showing the amount was rolled over? Or atleast $5000 of it?

I

Since the check was made out to client, code "g" is inappropriate therefore the
payor issued correctly box 7 coded 1099R.

[WhiteOleander]

RMD is calculated on the 12/31 balance at the end of each prior year and there is a different factor applied each year.

So to calculate the distribution you will have to have the 12/31 balance each prior year, apply the appropriate factor to determine the distribution and then apply the penalty for not distributing.

I would try to abate the penalty, but I don't know how successful you will be. I tried in 2004 when the broker forgot to distribute and we still haven't received.

If you have CFS Tax Tools, they have a module that will calculate for you the RMD each year.

Sandy

Sandy,

Whenever I requested a penalty abatement for a client, we were always ignored the first time around.

So, I would send another letter requesting the abatement. I would state that we had previously requested the abatement and had heard nothing. If the the IRS was refusing the abatement, the client would like a letter explaining the reason for the denial.

We always received the refund after the second letter. With interest!!!! I think they ignore the initial requests.

HTH

[geekgirldany]

Thank you all for responding and helping me on this. I am trying to figure this out as I am a little confused. I can't think to clearly been working on taxes so much. I am reading and reading what you guys have posted.

Just another quick question... will I have to do a 5329 for each year that had a RMD showing the penalty?

[WhiteOleander]

Thank you all for responding and helping me on this. I am trying to figure this out as I am a little confused. I can't think to clearly been working on taxes so much. I am reading and reading what you guys have posted.

Just another quick question... will I have to do a 5329 for each year that had a RMD showing the penalty?

Yes you have to use the 5329 form for each year you have to figure the penalty.

There is a place at the bottom of the form for the T/P to sign since the form is not being filed with the original 1040.

[geekgirldany]

Thank you I think I am getting it now.

[geekgirldany]

Since the check was made out to client, code "g" is inappropriate therefore the
payor issued correctly box 7 coded 1099R.

I was just looking in TTB and saw this too about rollovers:

"Not allowed as a rollover. The following distributions are not
eligible for tax-free rollover treatment:
• Distributions that satisfy the RMD rules."

She was given a choice by the company to do a RMD or a full distribution. She done a full distribution to satisfy the RMD rules. So really she should not have put this into another IRA with the understanding that it was a rollover.