double RMD payment due to custodian error

Submitted by Charles Csakai on Thu, 2019-02-21 20:17

Client took his RMD in January 2018. Custodian had set up annual RMD distribution in August per previous instructions from client. Custodian sent out full RMD in August 2018. Client did not notice double RMD until 1099-R was received.

What, if anything, can be done?



Submitted by Alan - IRA critic on Thu, 2019-02-21 20:58

  • Is the August distribution large enough to warrant an attempt to portray the second distribution as “Custodian error” when it is more likely client error?  If so, check out the following procedure for extension of the 60 day rollover deadline for the second distribution. Also, note that even if the amount was rolled back, it would increase the 2019 and later RMDs since the 12/31/2018 balance would have to be increased by the amount of the rollover.
  • https://www.irs.gov/pub/irs-drop/rp-16-47.pdf

Submitted by Charles Csakai on Fri, 2019-02-22 20:30

My bad.  I forgot to mention that the account is an inherited IRA.  (The RMD was over $44K, so the error is sizeable).

Submitted by David Mertz on Fri, 2019-02-22 20:51

  • If the client is not the spouse of the deceased, no rollover is permitted.
  • Taking the additional amount out might not be all that bad.  Investing it in capital investments outside the IRA where gains can be taxable at long-term capitial gains rates might be more beneficial than leaving the money in an inherited IRA where gains will be taxable as ordinary income.

Submitted by Bruce Steiner on Sun, 2019-02-24 19:31

  • For the same reason IRA contributions generally make sense, it’s generally better to keep the money in the IRA as long as possible.
  • Bruce Steiner

Submitted by David Mertz on Sun, 2019-02-24 20:21

My point is that the downside of taking additional taxable amounts out of an inherited traditional IRA now can be partially (or in some cases entirely) offset by more favorable capital-gains tax treatment on growth outside instead of inside the IRA later.  Capital assets also receive a step-up in basis upon the death of the owner while most people will not be able to take a deduction for IRD distributed from an IRA.  The downsides and benefits of taking distributions now instead of later need to be evaluated on a case-by-case basis.  https://www.kitces.com/blog/tax-rate-equilibrium-for-retirement-taxable-income-liquidations-roth-conversions/

Submitted by Alan - IRA critic on Fri, 2019-02-22 20:59

If client is still working, client can use the proceeds from the inherited IRA to subsidize maxing out the workplace plan if not already doing so. Note that the inherited IRA snafu illustrates some of the pitfalls of automatic RMDs since there must be coordination between custodian and IRA owner to prevent errors.

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