QP Plan RMD correction
An advisor I work with has a client who has an $500,000 IRA and $3,300,000 vested balance in his former employer’s 401(k) PS plan. The client is retired, turned 70 1/2 March 2010.
The advisor thought the aggregated RMD could be taken solely from the IRA account. The $500,000 was rolled over this year from the DC plan to the IRA. $140,000 has been distributed from the IRA this year under the mistaken belief that this would satisfy the client’s total RMD obligation.
His question is whether there is any way to “recharacterize” an amount of the $500,000 rollover equal to the RMD that must be distributed from the plan thereby meeting the regulations and avoiding a seccond RMD being forcecd from the plan? The Broker Dealer has a form to claim that there was an over contribution in the rollover and roughly $130,000 of the rollover should not have been rolled over but distributed from the plan for RMD. However, this would then result in $130,000 more being distributed from the IRA for tax year 2010.
When asked if the year to date distributions have already been reported to the IRS as a regular distribution, the answer was “no”, that will be reported after 12/31/2010. The advisor then asked if the distributions, which were made in gross monthly distributions of about $17,500 over 8 months with federal and state whithholding taken out, could be “recharacteized”, he was again told no.
Is the BD correct in saying the previous 2010 monthly distributions cannot now be reclassified or are they unwilling to go through the hoops to help straighten this out?
Thank you for your answer.
Permalink Submitted by mk foss on Thu, 2010-12-02 22:47
Amounts taken from the IRA within the past 60 days could be “rolled back” to the IRA but outside of that, there’s nothing I’m aware of that can be done.
Permalink Submitted by Alan Spross on Thu, 2010-12-02 23:03
Is the broker the IRA custodian? The potential solution may reside in completing that form if the form requests distribution of an excess IRA contribution due to incorrect rollover information due to error by the 401k administrator. This is generally referred to in Pub 590, p 50, “excess due to incorrect rollover information”.
To backtrack a bit, the 401k should have distributed the plan RMD to the client and not processed a direct rollover before isolating the RMD from it. They apparently blew this. But the RMD is nonetheless deemed satisfied by the direct rollover, although rolling it over to the IRA created an excess contribution to the IRA, which needs to be distributed with allocated earnings.
Here is where the IRA custodian is going to have to exert some initiative, and perhaps the client has enough money to wield some leverage. The IRA custodian would have to treat each IRA distribution as a partial corrective distribution. They consolidate the separate distributions as a single annual total anyway. So they would need to attempt to figure an earnings allocation to each IRA distribution. The IRS is not likely to quibble about the mechanics if the 1099R looks reasonable, so the custodian could probably jury rig the earnings calculation. There is no IRS requirement that an excess contribution must be corrected in a single transaction, so the custodian would have to accept that the corrective distribution occurred in installments. I am not clear whether client had an IRA balance on 12/31/09, but if so the IRA would also have an RMD requirement also. But this approach would contain the total distribution to the RMD for the plan plus or minus a few thousand.
The IRA custodian would have to code these distributions to the extent of the excess amount on a separate 1099R using the proper code and NOT as a normal code 7 distribution. Any shortfall remaining would have to be distributed as well, and this is affected by whether there was a prior IRA balance or not. Additional amounts distributed would get a separate 1099R with the 7 code.
Client would report a taxable distribution on line 16 of Form 1040 equal to the correct plan RMD. Any additional amount would show as a non taxable rollover. This wil take an explanatory statement with the tax return because it will not match the 1099R from the plan. That one will show the whole thing as a G coded direct rollover, although it may be worth the effort to request they report it correctly. After all, their error started all this.
I am reasonably sure if these custodians cooperate and understand the situation, and issue the 1099R forms as suggested, no one should be hearing from the IRS. If they refuse, the Plan B would be a private letter ruling at a cost of 10k plus.