401K Custodian Failure To Deduct RMD Before Rollover To New Custodian

Submitted by Tom Rea on Wed, 2017-11-29 02:44

I have a situation involving a 401K custodian failing to deduct an RMD when transferring funds in 2017.
Custodian A held a 401K account titled in the name of a Trust. Custodian A rolled over the entire account to a new IRA-BDA Trust account at Custodian B but neglected to deduct the 2017 RMD before moving all of the funds. Custodian A sent me a letter, Nov, 2017, informing me that they would issue two 1099Rs; one with code P in Box 7 to report $58,000 required distribution not eligible for rollover treatment, and a second to report rollover of the balance to my IRA with code 4G in Box 7. I’m over 70.5 and have taken prior RMD distributions from custodian A.

While at Custodian B, the original IRA-BDA Trust was rolled over to an inherited IRA-BDA and then to an individual IRA with me as the spouse beneficiary. All of the original funds now reside in this account and there is no money in the first two accounts. There is a $33,000 RMD for 2017 which would normally come from my individual IRA with a code 7 for normal distribution. Custodian B wants to withdraw the $58,000 RMD for 2017 as this is the amount that would have been distributed had the original 401K account not been rolled over.

Is this the correct treatment for handling the RMD distributions? Are the codes on the 1099Rs correct and if not, what should they be? Will this proposed action satisfy the IRS or will I be taxed on the $58,000 and the $33,000?



Submitted by Alan - IRA critic on Wed, 2017-11-29 04:30

  • Custodian A is mishandling this by both missing the RMD and also by proposing to use Code P. You did a direct rollover to an inherited IRA and this is treated as a distribution and rollover. The RMD for the 401k was satisfied since it was included in the rollover. Custodian A should issue one 1099R with the 4G code for the amount in excess of the plan RMD, and another 1099R for the amount of the beneficiary RMD coded 4. The indicated P code makes no sense from Custodian A.
  • Custodian B then did a direct non reportable transfer from the trust to you individually, as the trust was apparently terminated. This should not be reportedat all. But this IRA (inherited and now owned) holds an excess contribution from having received the 401k RMD money. The IRA custodian needs to understand that the 401k RMD was included in the direct rollover in error and distribute it to you with allocated earnings. The correct code for this distribution is Code 8,4. Only the earnings should be taxable in Box 2a, not the 58,000 because that should already be taxed on the 401k 1099R coded 4 .
  • Is the IRA you have now an owned IRA via spousal rollover, or does it still show you as beneficiary? This is critical. Were you the sole beneficiary of the trust and the trustee also? Once we identify the actual status, we can determine the IRA RMD for next year, but for this year there is NO IRA RMD unless you had an IRA balance on 12/31/2016. Is that where the 33,000 is coming from?  Again, the RMD for the plan balance was actually included in the direct rollover and is taxable, but because it was also rolled improperly into an inherited IRA, it must come out of the IRA as an excess contribution. What you should be taxed on is just the 57,000 (plan RMD) plus any earnings on the corrective distribution that the IRA custodian must process. And if you had an IRA RMD of 33,000 for this year on an IRA balance that pre rated any of these rollovers, that would also have to be distributed.
  • None of this is that costly, but it is a mess to straighten out and report on your tax return. Hopefully, you can talk custodian A out of the P code and to issue two 1099R forms coded as stated above.
  • Let me know if something I stated does not reflect the actual situation.

Submitted by Tom Rea on Tue, 2017-12-05 00:54

Alan—thanks for your detailed answer to a convoluted problem.

  • After dealing with Custodian A and getting three different answers regarding their solution (two 1099Rs, one 1099R, code P, code 4, code 4g), I found out that they sent a letter to Custodian B admitting their mistake. As it stands now, Custodian A will issue one 1099R, code 4 for the $58,000 2017 RMD and one 1099R for the balance of the rollover coded 4G.
  • Custodian B will pay me the 2017 RMD and issue one 1099R, code 8. They are going to calculate the earnings attributable to the $58,000 and account for them in box 2A. I’m clueless as to how the excess earnings will be figured but they will let me know in 4 days what the number will be.

To your previous questions:

  • The IRA I own now was a spousal rollover
  • I am the sole beneficiary as well as the Trustee
  • This IRA account was established in July, 2017 so Custodian B is not taking any RMD from this account until 2018. It will be based on the balance in the account at the end of 2017. 
  • The $33,000 was their initial RMD number based on the original amount rolled over but it has been overtaken by events, is no longer applicable, and has been cancelled.
  • Hopefully both custodians will do their 1099Rs correctly the first time so corrected ones will not be needed.  I will stay on top of them until I’m sure we are on the proper path. 

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