403b rollover to IRA RMD issue
I have a client who turned 70.5 in September of this year. He had five 403b’s at different custodians. In March of this year he rolled over and consolidated all five 403b’s into a single IRA. Before he did the rollovers this year he took a $7,500 distribution from one of the 403b’s. His total 2011 RMD is $9,703. From reading this board I understand that the remaining $2,203 of his RMD should have been taken prior to rolloing it over to the IRA. But now that the rollover has been completed the IRS will deem that the RMD was made and my client has a $2,203 excess contribution in the IRA. Am I correct with that assumption?
To correct this I assume the client will need remove the excess contribution plus earnings, is this correct?
How does the $2,203 RMD that the IRS “deemed” the client to have taken get reported to client?
If we need one or more of the custodians who transfered the 403b’s need to report part of the distribution as an RMD and we can’t get any of the custodians to make the adjustment what options does my client have?
Can we until 2012 since his first distribution is not due until Apr 1 2012 and take everything ($2,203 plus the 2012 rmd) from the IRA?
Permalink Submitted by Alan Spross on Wed, 2011-11-09 23:58
Your first paragraph is correct. Part of this possible because 403b RMD can be aggregated with other 403b accounts, therefore the full 7,500 counts toward the total RMD. The balance of the RMD did become an excess IRA contribution.
It may take some explaining to get the IRA custodian to understand that the rollover of an RMD becomes an excess contribution, but they should handle it like a typical IRA excess contribution and do the earnings calculation as you indicated.
The 403b plans will issue 1099Rs reporting direct rollovers, but the client should show the 2,203 as taxable on line 16b of Form 1040 and include an explanatory statement why this was done. The 1099R from the IRA custodian for the removal of the excess contribution should result in only the earnings being taxable on line 15b. There is no specific RMD annotation issued for any RMD, and the IRS assumes that any qualified plan is able to calculate and distribute the RMD. They don’t get year end account balances like they do from IRA custodians on Form 5498. In fact, the only way the IRS would discover this error would be through a complete taxpayer audit, probably triggered by something totally unrelated. But there is also no statute of limitations for excess IRA contributions, so if the IRS were to discover this several years down the road, they could levy several years of 6% excise taxes plus interest. Getting to your question, there is nothing that the client needs to do other than reporting as outlined earlier and making a thorough explanatory statement, and then removing the excess IRA contribution in the usual manner.
You could wait until 2012 to remove the excess contribution, but client still needs to report the taxable income on the 2011 return. His RBD of 4/1/2012 is immaterial here because his IRA rollover effectively moved that date forward to the date of distribution. Since the excess IRA contribution was made in 2011, any earnings on the contribution will be taxable in 2011, so it would be easier to complete that distribution before having the 2011 taxes done. The 2012 RMDs do not have to be taken until year end 2012.
Permalink Submitted by Gary Warner on Thu, 2011-11-10 00:09
Thank you very much for the timely and detailed reply! I really appreciate it.