RMD and Excess Contribution Correction
If a 73 year business owner has 1M in his profit sharing plan and did an in-service rollover/distribution of $200K to an IRA back in Feb, how is the correction handled? My understanding is his $68K RMD for 2008 should have been taken prior to the rollover to the IRA. So now, do we take out the $68K from the IRA as an excess contribution and report this amount on his 1040 as his RMD (thus not taking anything out of his profit sharing plan for his RMD)? How does the custodian handle the corrective distribution of the excess contribution form a reporting standpoint? Lastly, his $200K is now $160K due to market declines, how do we factor that into the equation when determining how much to take out of the IRA? Thank you for your help!
Permalink Submitted by Alan Spross on Tue, 2008-12-02 18:53
The distribution of 200k was deemed to include the 2008 RMD amount. However, since an RMD is ineligible for rollover, it is treated as an excess regular contribution to the IRA as you understand.
The IRA custodian should be informed of the facts and issue a corrective distribution with the same income calculation used in any other excess contribution correction done by the extended due date. The calculation must include the investment results of the entire IRA account that received the excess, not just the results of the 200k rollover. Nonetheless, in this market earnings are likely to be negative and this will result in less than 68,000 being distributed in the corrective distribution. There is no penalty of any kind here, but the taxable income along with any other IRA RMD distribution will show on line 15 of Form 1040. I would also suggest an explanatory statement be added to the return showing why there is no taxable income on line 16 as would be expected by the IRS.