Mess
Here’s one for you –
Client hits RMD age in 2021. Client takes annual lifetime payments from IRA Annuity in 2021 and rolls into IRA at broker. Annuity company reports on 1099R that this is a code 7, regular distribution. Broker IRA reports as rollover on 5498. Tax return shows as rollover. No taxes paid. RMD from brokerage IRA was taken, reported correctly on 1099R and on tax return. IRA Annuity distribution is double the RMD amount.
Repeats in 2022 and 2023.
In 2024, Annuity company distributes the annual lifetime payment directly to client. No rollover completed. 1099R shows code 7. Broker RMD is distributed.
In 2025, we recognize a problem. Problem appears to be that the RMD for the IRA Annuity was never taxed, never showed up on the client’s tax returns. All of the distribution was rolled over.
My thoughts are that we could claim that the IRA Annuity RMD was distributed and rolled over, creating an Excess Contribution that needs to be distributed now and file 5329 to create Excise Tax on the RMD amount ineligible for rollover. Then, we would need to amend the return for each of the years. Does that seem reasonable? Also, would we need to have the IRA Annuity company amend the 1099Rs?
The other option is we approach it from the claim that the RMDs were never taken. In this case the 1099Rs would be incorrect, as the 5498 shows Rollover. In this case, we would have to distribute all the IRA Annuity RMDs and file 5329 to report missed RMDs and likely pay 10% penalty.
Thoughts? -m
Permalink Submitted by Alan - IRA critic on Mon, 2025-02-03 14:23
It’s a mess all right. You are on the right track, but the custodian will never reissue a 1099R.
While the Secure Act Regs currently indicate that the total RMD for all IRAs must be completed prior to any rollover, the former rules only stated that the RMD for each particular IRA must be completed before a rollover is done. Therefore, in this situation, the timing of distributions from each IRA can be used and that might reduce the amount of RMD rollovers and excess contributions. The old rules can therefore be used for 2021-2023.
In addition to the ineligibility to roll over RMDs, there is also the issue of the one rollover rule for 12 months, which would also create excess contributions for this violation, but given the RMD rollover possible duplication of dollars with the one rollover rule, I would ignore the one rollover issue in this situation. The IRS does not focus on the one rollover rule, mostly leaving that up to the custodians to enforce.
In short, the 1099Rs are correct, and the RMDs have been completed, but taxable income was not reported, and the 5498 forms will include some RMD amounts that were not eligible for rollover and created excess contributions. Those excess contributions will have to be withdrawn from the IRA, now after the due date so no earnings calculations need be done. The challenge here is that because the taxes will be reported on the amended returns, the IRA custodian must understand that any RMDs rolled over must be treated as regular IRA excess contributions withdrawn AFTER the due date per Sec 408(d)(5), which results in the taxable box 2a of the 1099R being left blank. This will prevent double taxation for the same amounts.
Permalink Submitted by Mhotchkiss on Mon, 2025-02-03 15:00
So, add up all the RMDs for IRA Annuity for 2021, 2022 and 2023. Take that amount from Broker IRA in 2025. Ensure Broker IRA custodian treats this distribution as Excess Contributions withdrawn after due date. This will ensure 2025 1099R for that amount will show box 2a is blank. This will be a separate or an additional 1099R for 2025 for RMD taken from Brokerage IRA?
Then, file amended returns to report additional RMD taxable income that was previously not reported. This will result in additional taxes at the rate based on that year’s brackets plus, likely, interest?
I’m presuming 5329 for 2021, 2022 and 2023 along with amended 2021, 2022 and 2023 returns filed at same time? – m
Permalink Submitted by Alan - IRA critic on Mon, 2025-02-03 15:26
The IRA excess contribution removal will require a separate 1099R different from the RMD 1099R because of the difference in Box 2a. For a non excess distribution (RMD) the 2a amount must be the same as Box 1. Because all the other boxes are the same for each, there is a risk that a plan might combine into a single 1099R, which is why the corrective distribution should be specifically requested as a removal of excess per Sec 408(d)(5), with Box 2a blank.
Yes, the amended 104oX forms will tax due will probably result in an IRS bill for late interest. Hopefully, the additional income will not be high enough to justify a substantial underpayment penalty.
Yes, the 5329 forms for each year can be filed with the 1040X, but for 2024 the 1040X will only involve the 2024 5329.
While unlikely, if the 2024 distributions exceeded the RMD, the extra amounts would reduce the 2024 excise tax amount shown on the 5329.
Not sure if the IRA annuity has been annuitized or not, but if so the 2024 annuity payments may exceed the RMD for the annuity and that would result in the amount of the total distribution that exceeded the RMD in removing some excess. This is all handled on the 5329.
Permalink Submitted by Mhotchkiss on Mon, 2025-02-03 15:57
much appreciated – m