incorrect birthdate used for RMD for inherited IRA
I inherited an IRA account from my mother in 2004. The financial firm used my mother’s birthdate rather than mine for the RMD. I discovered the mistake November 2011. The firm admits that they made the mistake and will offer me a proposal. Because this mistake will affect me for 30+ years, if the proposal from the firm is inadequate, what is my recourse? The RMD based on my mother’s birthdate was 4 times the amount it should have been versus if my birthdate had been used. My three siblings had their correct birthdates used for their distributions. It has been six months since I discovered the mistake and the firm has been dragging this out with promises of a settlement in 7-10 business days which never come.
Permalink Submitted by Alan Spross on Thu, 2012-04-26 02:17
So far you have taken 6 inflated RMDs as RMDs were waived in 2009. Determining your loss from a combination of accelerated taxes and lost future tax deferral is a very subjective exercise, and you will need legal counsel to represent you if you do not agree to the proposed settlement, which itself will be taxable income. You may also need counsel to secure an offer if the procrastination continues. Admission of their error is a vital first step, but they will probably take the position that you should have pointed out their error after the first distribution, and this is one reason why any proposed settlement becomes subjective.
This is not a situation that would typically involve the IRS. The IRS only cares that you did not take out LESS than the RMD and that you pay taxes on the amounts actually distributed. While the IRS often approves extensions of time to complete rollovers, those are only offered for funds that are eligible for rollover in the first place, so your best bet is probably the best settlement you can get from the custodian.
Permalink Submitted by mk foss on Thu, 2012-04-26 03:18
In some situations when a settlement has been reached because of misconduct by the custodian or a representative of the custodian (investment advisor), the IRS has allowed the settlement to be rolled into the IRA. This does not seem to be possible in this case because an inherited IRA cannot except rollovers from the beneficiary. However, Bruce Steiner wrote an excellent article on “restorative payments” and there may be a way using that law to defer the taxation of a settlement. A PLR may be needed if this theory has any legs.