Should this TIRA distribution be on 2017 or 2018 1099-R?

Submitted by fairira on Wed, 2018-01-31 21:58

A TIRA’s RMD was satisfied in early 2017.

On 12/29/17 an additional TIRA distribution of $1,000. was requested from a Vanguard TIRA to a Vanguard nonretirement account. Perhaps because of Vanguard’s account requirement that a settlement fund be used in an intermediate step, this transaction did not settle until the next business date of 1/2/18.

The $1,000. is included in the end-of-year balance of both the Vanguard nonretirement account and the TIRA account (where it is shown as “Unsettled activity”). Vanguard shows a trade date of 12/29/17 and a settlement date of 1/2/18 for this distribution.

However, their 2017 1099-R does not include this $1,000. which instead is shown as a 2018 IRA distribution. Vanguard says this is because with IRA distributions, the settlement date determines when the money is really in the recipient account and thus the true distribution date.

Does the settlement date (and not the trade date) correctly determine the year of distribution? If not, I will struggle to get Vanguard to include this distribution in the 2017 1099-R and would request any helpful advice.

Thank you.



Submitted by Alan - IRA critic on Thu, 2018-02-01 04:10

  • This question seems subject to many variables, but the theory of constructive receipt comes up the most often. Under that principle that was originally formulated based on the receipt of a mailed check, the date you received the check would determine the year you were taxed on the distribution. This has nothing to do with trade vs settlement, but under current electronic account updating, I think the day that the balance appears in your taxable account is the day of constructive receipt regardless of how many days it took to get there. So when the balance appears in both accounst simultaneously, there is a quandary.
  • Getting back to 1099R reporting, I suspect that there are variations from firm to firm on how they handle interpret these rules. Did Vanguard suggest that recent changes to settlement accounts changed their 1099R reporting? Certainly, a balance should not appear in both accounts since at year end this affects RMDs. 
  • If you can show that the amount appeared in the taxable account in 2017, you could report it on your return and the IRS would be happy to accept the taxes, but the real challenge would be a year later when the 1099R was issued and you have to convince the IRS that you correctly reported the income in 2017. You would need some kind of documentation that the amount was included in your taxable account year end balance. The following case might be helpful, although the situation is reversed, and it probably is not worth contesting the year of 1099R issue for such a small amount:
  • https://www.irs.gov/pub/irs-wd/06-0005.pdf

Submitted by fairira on Thu, 2018-02-01 06:51

Thank you, Alan, for your helpful and incisive comments (as always) and your mention of “constructive receipt.”I looked at the case you listed and found it clarified whether or not I had constructive receipt of the $1,000. that appears in the end-of-year statement for the nonretirement account (as well as in that for the TIRA).  To quote from the case you listed:”A taxpayer ‘constructively receives’ income when a payer makes it available so that the taxpayer can draw upon it at any time, or so that the taxpayer could have drawn upon it during the taxable year if he or she had given notice of intention to withdraw. [Section 1.451-2(a) of the Regulations]. However, income is not constructively received if the taxpayer’s control of its receipt is subject to a substantial restriction or limitation.”Though the year-end statement for the nonretirement account lists the $1,000. as of 12/29/17, its inclusion took place upon or after the close of business on 12/29/17 and I would not have been able to draw on it before the next business day of 1/2/18.  Thus it appears that I did not have constructive receipt of it on 12/29/17 and so then this became a 2018 distribution.So I will not contest this with Vanguard or the IRS but will complain to Vanguard about their listing this simultaneously as both a TIRA and a nonretirement asset in 2017, thereby increasing my 2018 RMD as well as confusing me.Thank you again.   

Submitted by Alan - IRA critic on Thu, 2018-02-01 15:55

Of course, if this was a part of your 2017 RMD, it would leave you short resulting in having to request a penalty waiver on Form 5329. IRS would likely grant the waiver, but it’s another form to file. It will also be interesting to see if Vanguard can come up with a solution to this.

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