5498 Reporting & Recharacterizations
If a client who is subject to RMDs did a Roth conversion in 2010, and decides to recharacterize the conversion in early October (assuming they’ve met filing and/or extension requirements), that amount would need to be added into their 12/31/10 account balance to accurately calculate their RMD for 2011. Since RMD notifications must be sent by the end of January and 5498s are issued in May (and therefore wouldn’t be adjusted for recharacterization) is there any requirement that a firm notify the client of an adjusted 12/31/10 account value for RMD purposes? Or, would this responsibility to add the recharacterized value back in fall to the client and their accountant?
The same question applies for rollovers that were distributed in the end of December, and not rolled back into the IRA until February. Those values will need to be added to the 12/31/10 account value, but won’t be reported until 2011 5498’s go out in May of 2012.
Ultimately, whose responsibility is it to provide an accurate FMV (including recharacterizations and rollovers) for RMD purposes?
Permalink Submitted by Alan Spross on Wed, 2011-01-19 21:38
Good question, since the the Inst for Form 5498 list the 5/31 deadline date. This appears to assume that recharacterizations will be completed by the due date and disregard the effect of the extended due date. I can find no specific reference beyond a general requirement to correct errors on these forms. If a custodian receives a recharacterized conversion after May, they should recognize that their prior year FMV is incorrect, but only if they are the same custodian. Notices 2002-27 and 2003-3 would have been the place to address this, but this specific issue was not addressed.
Further, if the recharacterization is made to a new TIRA with a new custodian, that custodian will have no knowledge of the prior custodian, and no error of their own to correct. With the lack of specific guidance, I suspect that most of these fall through the cracks, but the final responsibility remains with the IRA owner to get their RMD correct. Custodian reporting is designed to aid the IRA owner, but does not absolve the owner of responsibility to take their RMD.
I suspect that a well written waiver request for the 50% penalty would be granted by the IRS, but IRA owner would still be expected to distribute the correct amount of RMD if and when the omission is discovered. This is reinforced on p 34 of Pub 590 (09 edition), “Outstanding rollovers and recharacterizations”.
A few years ago there were many IRA owners taking distributions prior to year end and completing the rollover within 60 days with the sole purpose of depressing the year end FMV, and the IRS caught on to that. However, it does not appear that the IRS has taken any action on the conversion scenario where there is no 60 day deadline. Large amounts can therefore be converted and held to the extended due date before recharacterizing, so if there is further abuse of RMDs, the IRS will probably reinforce reporting requirements with more specific guidance.
Permalink Submitted by Alanna Crawford on Wed, 2011-01-19 22:29
Thank you very much for your thorough response!