Did I miss a required RMD? How to calculate this year’s RMD?

Submitted by Kay Barden on Wed, 2022-09-21 18:19

I inherited 3 retirement accounts from my sister who passed away in 2020 before she was required to take any RMDs. I am an EDB, I rolled over two of these which were 403(b)’s into traditional inherited IRAs, and began taking RMDs from these two in 2021 based on my LE. However the third account was a 401(a) defined benefit plan from a state government, and due to the extensive documentation required I wasn’t able to claim the money until April 2022, when I did a trustee-to-trustee rollover into an inherited IRA.

Clearly I need to take a RMD from this third account now. I would like to do the RMDs based on my LE. On what value do I base my 2022 RMD calculation – the year-end 2021 value, which I don’t know since I’ve never gotten a statement from the government pension plan? Or the rollover amount from April 2022?

Have I run afoul of the law by not taking a RMD for 2021, even though I couldn’t because I didn’t have the 401(a) money in my possession? Do I owe that money plus the IRS penalty?

Thanks.



Submitted by Alan - IRA critic on Wed, 2022-09-21 19:40

  • If these direct rollovers were done without the plans distributing any RMDs to you, it might reflect a plan provision mandating the 5 year rule for deaths prior to RBD, since there would not have been any RMDs in years 1-4. Or it might reflect simple plan incompetence. Plans may also provide for LE RMDs or for you to make an election between the 5 year rule and LE by the end of the year following the year of death, and if so that deadline would have been 12/31/2021. 
  • These are 3 separate plans and therefore could have 3 differing RMD provisions for beneficiaries when death occurred prior to the RBD.  Note that these rules were not changed by the Secure Act, and in fact the Secure Act provisions for govt plans did not apply for deaths occurring prior to 2022. While you would then not technically be an EDB, that does not matter since these plan provisions for the 5 year rule v LE were not affected by the Secure Act, and EDB RMDs would have been the same as designated beneficiaries prior to Secure. 
  • Worst case scenario is that all these inherited IRAs would be subject to the 5 year rule and must be drained no later than 12/31/2025. Any chance of determining what the plan provisions were for any of these plans?

Submitted by Kay Barden on Wed, 2022-09-21 21:02

  • One of the 403(b)’s was a Fidelity Workplace account, they informed me I could take RMD over my LE and gave me the 2020 year end balance and calculated the 2021 RMD for me, so that plan is OK as I chose LE method. I then rolled this workplace account into a Fidelity inherited IRA.
  • The other 403(b) was a Vanguard Employer account, they allowed a choice between the 5-year method and LE, and I elected LE.  I then rolled over this workplace account into a Vanguard inherited IRA.

As I indicated, I have already begun taking the RMDs (based on my LE) from these two IRAs.

  • The third account is the 401(a).  The rules of this state government pension for a nonspouse beneficiary state that I must do a direct rollover to an inherited IRA (I have done this) and “you will have to receive required minimum distributions from the inherited IRA.”  The paperwork they sent me does not get more specific than that.  The paperwork from the pension plan did not require me to make an election regarding RMDs.  In April 2022 I rolled this into a T. Rowe Price Inherited Traditional IRA.

So have I missed a RMD from this last plan, was I supposed to take one in 2021?  Even though I was not able to claim the money until 2022?  How do I calculate my RMD for 2022?

Submitted by Alan - IRA critic on Wed, 2022-09-21 23:40

  • Late access to an inherited account does not affect the RMDs that should have been distributed. What they quoted you is vague, but does not sound like the 5 year rule. As such, the LE RMD for 2021 was late, but technically the direct rollover to your inherited IRA is a distribution and therefore includes both the 2021 and 2022 LE RMDs, whatever they would have been. Both of these RMDs have therefore been completed, but the 2021 RMD was a year late, and you do not know exactly what either the 2021 or 2022 RMDs should have been without a prior year end balance. At this point, unless you want to press the plan for those two balances, your only option is to estimate what they might have been, but since this is a DB plan and not a 401k there is no easy way to do that. You would therefore likely use the amount rolled over as your estimated year end balance for both years.
  • Note that since the distribution included the RMDs, and RMDs are not eligible for rollover, your inherited IRA received excess contributions of $x that need to be distributed as such from that inherited IRA. The IRA custodian can determine what your gain or much more likely your loss has been since April. They would distribute the loss adjusted amount to you, and you would have to explain to them that you rolled over RMDs of $x (after you estimate what those RMDs should have been). The inherited IRA custodian should be informed to treat the RMD amount rolled into the inherited IRA as an excess regular IRA contribution and should therefore not be shown as taxable on the 1099R. Taxes will already have been paid on the RMD portion from the DB plan.
  • Since all of the above processing will be inexact and very time consuming, and the various custodians may not cooperate, if the amount of this inherited IRA is not large, you might consider treating it under the 5 year rule, as that would eliminate any beneficiary RMDs until year 5, and eliminate the need to file a 5329 requesting the penalty waiver.

Submitted by Kay Barden on Thu, 2022-09-22 19:42

This is my first time as a nonspousal IRA beneficiary and I’m too young to take RMDs from my own retirement accounts, so this is confusing for me, and I’ll have to ask follow-up questions.

  • You say “both of these RMDs have therefore been completed.”  I don’t understand the word completed here – I haven’t cashed out/taken an RMD yet, have I?  The point of having the custodian calculate the RMDs for 2021 and 2022 is so that I can sell them from the account?
  • The Rollover Distribution Election form I filled out for the pension plan states that for my 100% Direct Rollover the Trustee/Custodian will “separately account for the taxable and non-taxable portions of the rollover.”  I assumed this referred to any Traditional or Roth portions, but perhaps this meant instead the non-RMD portion and the RMD portion?
  • If the IRA custodian “has agreed to separately account for the taxable and non-taxable portions of the rollover,” how could I have made excess contributions? Wasn’t it the custodian’s job to make sure I didn’t make excess contributions?
  • When you say “taxes will already have been paid on the RMD portion from the DB plan,” when did I pay those taxes?
  • Since I never made any election regarding RMDs on the rollover paperwork, how does the IRS know whether I’m using the 5 year, 10 year, or LE method?

Thanks.

Submitted by Alan - IRA critic on Thu, 2022-09-22 22:21

  • Yes, you have a complex set of  issues here. A direct rollover from an employer plan is composed of a distribution and rollover and is so reported on a 1099R. However, ANY distribution in an RMD year is applied toward the RMD for that year and prior year RMDs as well, and is therefore not eligible for rollover. So as long as the distribution is at least equal to your RMD, the RMD is completed (satisfied). But there are two downsides to this. First, because the RMD funds were deposited into an inherited IRA during the direct rollover, an excess IRA contribution is created to the IRA which must be corrected as an excess IRA contribution. The second downside is that this situation complicates tax reporting because you should report it differently than the 1099R indicates. The 1099R will show a non taxable direct rollover, but because RMD money was included, the RMD amount must be reported as a taxable distribution and the reason indicated on an explanatory statement with your tax return. This isn’t costly as far as your taxes are concerned, just a hassle to report. If the subject of RMDs came up with these plans, they should have just distributed the RMD to you and not included the RMD money in a rollover. It is not clear why they did not do that, as the plan is responsible for complying with IRS RMD Rules and can force out an RMD. You are also jointly responsible. While this scenario occurs frequently with owned accounts (employee retires and rolls over a plan to their IRA), it is rare for inherited accounts.
  • With respect to the Election Form, referral to taxable v non taxable would not relate to RMDs. It would refer to Roth contributions or after tax non Roth contributions that the plan holds or to your option to have the balance rolled into an inherited Roth IRA, which would make most of the rollover taxable.
  • Yes, it was the plan administrator’s job to separately distribute the inherited plan RMD UNLESS the plan provisions dictated that the 5 year rule applied. If the 5 year rule applied, in the first 4 years no part of a distribution is considered to be RMD money, so you could legally roll over the entire balance, but for this third plan, because the rollover was not completed by the end of 2021, if the 5 year rule applied to the plan, it would also have to apply to the inherited IRA. This is a possible explanation for the plan failure to separate out the LE RMD, but the plan never explained any of these issues to you. As for the receiving IRA custodian, they would have no control over this situation and would just deposit the direct rollover funds they received.
  • You would have to determine the RMD amount (a separate challenge in itself), and report that portion of the 1099R as taxable on line 5a and 5b of Form 1040. This is the same taxable amount  that should have been distributed to you separately by the plan rather than including it in the direct rollover. Again, the 5 year rule is a possible explanation for the plan not separately distributing the LE RMD to you. 
  • The IRS does not know. They pretty much leave that up to the distributing plan, and they actually trust these plans much more to comply than they do private taxpayers, since the rules are so complex. IRS enforcement of inherited plan RMDs has always been largely non existent.
  • Because your scenario is so complex with some of the info indeterminable, if treating this plan as falling under the 5 year rule is not palatable due to loss of your life expectancy stretch, you might consider a technically incorrect approach of simply estimating what you think would have been the 2021 and 2022 plan RMDs, and distributing that amount from your inherited IRA. You could then simply report according to the 1099R forms as issued. Your taxes due for 2022 would be approximately the same as if this was done correctly, but with much less reporting hassle. I don’t know if it is possible for you to get some direct answers from the plan administrator regarding the plan provisions, whether the 5 year rule applies, or why they did not distribute a LE RMD separate from the direct rollover.

Submitted by Kay Barden on Fri, 2022-09-23 04:12

  • Thanks, this is helpful.  I did speak to the pension plan and they said there was no 5-year rule and that the time period of draining the account was essentially up to me.   I don’t know how much confidence to put in their answer but I’ll take it as accurate since I prefer a LE stretch anyway.  A 5-year rule is not palatable to me. I will ask T. Rowe Price to determine my 2021 and 2022 RMDs and see what numbers they come up with, and if they match what my estimates will be (I’ll use the April 2022 rollover amount as a year-end value since that’s the only real number I have).
  • I will ask T. Rowe Price to rectify the excess contributions.  I’m not all that optimistic they will know how to do this given my experience with their retail side, but maybe their back office will be more competent.
  • And I will definitely have to file a 5329 requesting the penalty waiver, correct?
  • “IRS enforcement of inherited plan RMDs has always been largely non existent.”  This is good news.  I’ll just do the best I can, and hopefully this won’t be the year they suddenly ramp up enforcement.

Submitted by Alan - IRA critic on Fri, 2022-09-23 14:50

  • That makes sense. If TRP is not willing to treat your estimates for the pension RMDs that were rolled over as regular excess contributions and issue a 1099R coded as an excess removal (no taxable income in Box 2a since there has almost surely been losses since April on that excess), just request a dollar distribution that will be taxable. If you do that do NOT report the RMD portion of the direct rollover as taxable. That will avoid a hassle to avoid double taxation of the same dollars. 
  • If TRP will process the return of excess as mentioned above, I would file the 5329 for 2021. Otherwise, if you have take just the dollar distribution, I would not file the 5329.

Submitted by Kay Barden on Fri, 2022-09-23 17:10

Just curious, if I take both the 2022 and the overdue 2021 RMD this year, why wouldn’t I file the 5329? I thought the 5329 was required to let the IRS know I’m taking an overdue RMD?  Or does the IRS not know my RMD is overdue because I didn’t open the IRA until 2022?

Submitted by Alan - IRA critic on Sat, 2022-09-24 04:00

Your reporting must be consistent. As I indicated, the RMD was actually distributed, but 2021 was late. If you decide to report this correctly, which is a real hassle as I described above, requiring you to report the estimated RMD as a taxable distribution portion of the direct rollover, contrary to the 1099R, and then requesting the removal of the excess contribution from TRP, which they would have code correctly on their 1099R. A qualified plan RMD cannot be satisfied with a distribution from the IRA. Therefore, if you choose to take on this entire reporting hassle, then filing the 5329 for 2021 would be consistent. But if you choose to report the direct rollover as non taxable (consistent with the 1099R you will receive in January), filing a 5329 would not be consistent because you cannot request a penalty waiver until you make up the late RMD, by generating a taxable 1099R. Removing the plan RMD from the TIRA might show good faith should the IRS every inquire about this, but your tax reporting would not be consistent with the 1099R. Therefore, I recommended that you only file the 5329 if you decide to report the RMD amount as a taxable distribution, and the excess of the two RMDs as a direct rollover, and file an explanatory statement with your return explaining why you are reporting the direct rollover as only a partial direct rollover. I understand that this is very confusing including for the IRA custodian and the IRS itself.

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