Time to take RMD

Submitted by David Hogan on Thu, 2016-11-17 14:58

I continued working past the age of 701/2 and my company allowed doing this and I did not have to take

any RMD. In addition I rolled my Ira to the 401-k plan and took no RMD.

In March of this year I retired and transferred the entire amount to an IRA.

I then took the balance at 12/31/2015, computed the RMD and took that amount from my IRA.

Should I have taken the RMD first and then made the transfer.

Either way my tax return will show the proper taxable amount for 2016 but I am now concerned that I may have

broken some rule and get a penalty.



Submitted by Alan - IRA critic on Thu, 2016-11-17 18:00

Your retirement made 2016 an RMD distribution year for the 401k, so if the plan knew you were going to retire OR certainly if the rollover was done after your retirement, the plan should have distributed the RMD first or at the same time as your direct rollover. Not having done that, the plan RMD has been rolled over to your IRA. Note that the plan RMD is considered satisfied in the rollover, but RMDs are not eligible for rollover so you now have an excess IRA contribution to the extent of that plan RMD amount.

  • Problem here is that you withdrew the RMD as a normal distribution from the IRA rather than as a corrective distribution with any allocated earnings. The 1099R from the IRA will be wrong and it is probably too late to roll that money back into the IRA (60 day time limit) and have the corrected distribution done correctly. You also do not know what the plan is going to do with their 1099R. Technically, they should catch their error and issue you two 1099R forms, one for the amount of the RMD coded as a distribution and the other for the balance of the direct rollover.
  • How long ago did you take the IRA distribution? 

Submitted by David Hogan on Thu, 2016-11-17 21:41

1717The plan transferred with no rmd so on 7-22-16 I took the required rmd. I never suspected this would be a problembecause  Vanguard will issue the 1099. I know the plan people well but how can they help because Vanguard willissue a 1099 RMD. Is this thing fixable and how will the IRS know the difference as they get their tax either way.Is there a proper way to fix this? Any advice wil be really welcome. 

Submitted by Alan - IRA critic on Thu, 2016-11-17 23:17

If you had already retired before doing the IRA rollover, the plan messed up by transferring the entire amount. They should have sent the RMD amount to you instead of including it in the rollover.  At this point I suggest you wait until January to determine whether the plan will report the distribution on 2 forms, one coded as a distribution (RMD amount) and the other for the direct rollover of the difference. That would cause a major problem.But if they combine the entire distribution on a single G coded 1099R, then I suggest you do nothing other than reporting the IRA distribution on line 15 of your 1040 and the direct rollover in full on line 16. That would be your best outcome in many ways, as you would only have one taxable distribution and you would report on your tax return just as the 1099R forms indicate. The IRS will get the same tax bill from you either way. While this happens fairly often, the IRS does not seem to be making an issue that the taxable income is on line 15 rather than 16 (401k). But if the plan sends you 2 1099R forms, then you will have two taxable distributions reported to the IRS.because you did not request the IRA distribution be treated as an excess contribution.

Submitted by David Hogan on Fri, 2016-11-18 12:51

If the irs takes a firm stand what would be the worst that could happen and is it possible to explain the oversight and have them ok it as they got full taxable amount in the year 2016. Is there any I think way they could apply the 50% penalty.My 401-k was in two parts-the Vanguard Pooled IRA and an annuity from an insurance company.I left the annuity in the plan and took that proportion of the 12/31/15 as an RMD in April and the Vanguard amount in July.There is enough left in the annuity to take the full RMD for 2016 and that would mean I wasted the deferral on the Vanguard payment. Would the IRS still have a cause to come after me because I transferred the second payment from the 401-k after the transfer to Vanguard. I think I read where you can ignore taking any RMD in the year of retirement and defer to April 1 of the following year as well as the one for that year. I am in a quandry as to what at this point is the best course of action. Your thoughts will be appreciated.

Submitted by Alan - IRA critic on Fri, 2016-11-18 16:50

  • You can defer the first RMD to the following year, but any distribution taken is automatically deemed to apply to that RMD, and that has already been done in the direct rollover. There is no option to defer an RMD when you have already taken a distribution of any kind in an RMD distribution year or later. The employer plan is responsible for getting your RMD completed and letting you know of any options. Have they not mentioned the RMD at all?  Could you ask them what format your 1099R will be for what has already been distributed?  There is no benefit to doing more transactions until the reporting of the completed ones is fully known. More transactions would likely just dig a deeper hole until it is clear where you stand, and you have a fairly rare 401k set up. It is not even clear if each portion needs to distribute an RMD or if the RMDs can be aggregated.  
  • Who is your IRA custodian, also Vanguard?  While this is an extreme long shot with a very slim chance the IRA custodian would do it, you might consider telling them what happened and ask them if there is any way they could change the IRA distribution you took to a corrective distribution since you rolled over a plan RMD. They may have the figures to calculate the earnings and they would have to distribute the earnings on the excess, and then report the total as a corrective distribution coded as such. That would eliminate taxes on the IRA distribution and would also correct the excess IRA contribution. Again, an extreme long shot. If they won’t do it, then I would advise to wait until the 1099Rs are all in front of you in late January, then check back here on any further options. You have until 10/15/2017 to address the IRA excess contribution if necessary.

Submitted by David Hogan on Fri, 2016-11-18 17:59

Vanguard says they will report the rollover to the IRS and also will  have a 1099 for for the distribution. The 401-k custodian says they will show the rollover and also  issue a 1099 for the distribution they made so in total the amount taxable in 2016 will be the proper amount calculated  based on the 12/31/15 balance. With those facts what would my options be and again if I take another distribution this would that solve the problem.I know I would lose the deferral and pay more tax this year but the thought of a penalty at 50% scares me . I got no where with Vanguard who again say they will report the transfer and also send a 1099 for the distribution.Would taking another distribution from the 401-k cure the problem.If i  do nothing and the IRS questions it do you know what the penalty would be.Hate to keep asking that same question but I appreciate your knowledge and opinion. 

Submitted by Alan - IRA critic on Fri, 2016-11-18 19:12

  • Apparently Vanguard must have recognized their error because they are going to issue two 1099R forms. But at the time of the distribution they failed to address the RMD or they would not have included it in the rollover. They would have issued a separate check to you. If they did not know of your retirement, it would be different but my understanding is that the plan knew you were retired when this was processed.
  • At least you know about the 1099R forms you will get. The problem now is not your RMD, but you will have 2 taxable distributions in the amount of the RMD when there should only be one. If you take a corrective IRA distribution now, you will still have two taxable distributions, and will in addition have both in your possession rather than one of them being an excess IRA contribution.
  • Taking another 401k distribution would not be helpful since you have already satisfied the 401k RMD. If anything, you would request a corrective distribution from the IRA custodian (is that also Vanguard?) to correct the excess IRA contribution. Only the earnings on that distribution would be taxable. That would eliminate all the possible IRS issues, but would leave you with two taxable distributions plus tax on a small amount of earnings and loss of tax deferral due to the extra distribution you took from the rollover IRA earlier.
  • If you do nothing further with the rollover IRA, as it stands you would have an excess IRA contribution because your prior IRA distribution did not include the earnings and was just a normal distribution, not the needed corrective distribution. And it is too late to roll that one back. For an excess IRA contribution there is a 6% excise tax for each year it remains in the IRA. If you do the corrective distribution no later than 1/15/2017, there will be no excise tax.
  • Check my earlier post about the long shot of trying to get the rollover IRA custodian to change the earlier distribution you took to a corrective distribution. While still a long shot, if Vanguard is both the 401k plan administrator AND the custodian of your rollover IRA it might provide you with some leverage since the reason you would be asking for the earlier distribution to be changed to a corrective distribution is due to an error all made by Vanguard. If necessary, they might consider communicating with each other to help resolve this. If that could be done you would obviously not need any other transactions and everything would be correct.

Submitted by David Mertz on Fri, 2016-11-18 20:46

  • As Alan said, your 401(k) RMD was satisfed by the distribution from the 401(k) that was rolled over.  It’s just that the portion of that distribution that was RMD now represents an excess contribution to the IRA.  Since the RMD was satisfied, there is no concern of a 50% excess accumulation penalty.  However, there is a concern about a 6% excess contribution penalty each year that the excess is in the IRA.
  • Even though the IRA distribution already taken was requested as a regular distribution rather than properly as a return of excess contribution, one could argue that the amount distributed actually represents the distribution of some amount of excess plus the earnings attributable to that excess.  In other words, “What amount of excess contribution would I have needed to request to be returned so as to result in a distribution of the amount actually distributed?”  If there were overall earnings in the IRA between the time of the rollover and the time of the distribution, a distribution of an amount equal to the excess would be less then necessary to make a return of contribution of the entire amount of the excess and some excess would still be present in the IRA.  If there was a loss between the time of the rollover and the distribution, an amount distributed equal to the amount of excess in the account would be greater than the amount necessary to remove all of the excess, so no excess would remain, and some portion of the distribution really would be a regular distribution.  The trick to this approach would be in getting the reporting to match what would be claimed to have taken place.  As Alan said, perhaps the IRA custodian can be persuaded to change the reporting to report the same gross amount as a corrective distribution (with appropriate calculation of earnings) instead.  If not, it may be possible to report this as having been reported incorrectly by the custodian and for you to prepare one or more substitute Forms 1099-R for filing with your tax return.

Submitted by David Hogan on Sun, 2016-11-20 17:18

Thank you for your advice. The more I think about it I see your wisdom in not taking another RMD this year. It makes sense to wait and see what the 1099’s say. If the worst happens and the IRS puts my feet to the fire do you have any thoughts on the cost to remedy this? Is there a statute or can they always go back and impose the 6% on the excess.

Submitted by David Hogan on Sun, 2016-11-20 17:20

y

Submitted by Alan - IRA critic on Sun, 2016-11-20 18:42

  • Since you already have a taxable distribution from both the 401k plan and the IRA, unless the IRA Custodian agrees to reform the IRA contribution to a corrective distribution including the earnings, you have already incurred the cost. A corrective distribution of the excess is not taxable except for the earnings. As for ignoring the excess contribution, there is no statute of limitations on excess contributions and the 6% excise tax would be due for every year that it is not removed. RMDs cannot be applied to the removal either.  That said, cases where the IRS discovers and excess contribution several years down the road are extremely rare.
  • Note that the excess contribution to the IRA is for 2016. The deadline for correcting it that requires the earnings to be distributed is 10/15/2017. Beyond that date, you can still correct it by withdrawing the excess amount WITHOUT the earnings, but that withdrawal would have to be after your IRA RMD is satisfied for the year. In other words, if you withdraw the excess and earnings by the deadline you avoid the 6% excise tax entirely, but after the deadline you owe the excise tax but do not withdraw earnings.
  • So the action plan now is to ask to talk to the top resource at your IRA Custodian to explain what happened earlier, ie you assumed you just needed to take out the plan RMD from the IRA and did not request a corrective distribution. This is an abnormal request and a real long shot so the average rep will probably not even understand it. That is why you should start with the expert if possible. This needs to be done ASAP before they send info to the tax dept for 1099R reporting for 2016. If by chance they agree, you are all done. If they don’t agree, then wait until all the 1099R forms come in and you can post back here in late January to help determine where you go from there.
  • Along the lines of what DMx suggested, if the gain or loss on the IRA distribution you took in March was small enough, perhaps they would agree to change the coding data for the 1099R without having to take a supplemental distribution. It would be preferable to get the 1099R coding changed if you can, so any solution that the custodian might come up with should be acceptable if they will report a corrective distribution for the distribution you already took.

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