Do I Have to File IRS Form 5329 For Each Year an RMD Was Missed?

By Jeffrey Levine and Sarah Brenner
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This week’s Slott Report Mailbag looks at the issues involved when an IRA beneficiary must take missed required minimum distributions (RMDs) for the original account owner, answers a question about the backdoor Roth IRA conversion and outlines the process of making SEP IRA contributions and converting those to a Roth IRA. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I have a quick scenario and question.

My friend died in 2012 at 80 years old and didn’t take his RMD for that year. His two beneficiaries (sons) discovered that an IRA account existed for the first time in 2016. Therefore, no IRA distributions occurred since 2011.

The sons want to take the following in 2016: the RMD required for their father in 2012 and then their required RMD from 2013, 2014 and 2015, as well as 2016 – all to be done in 2016.

Is a Form 5329 required to be filed for each year: 2012, 2013, 2014 and 2015 for each of the sons indicating how much the RMD would have been? And must they then request a waiver for reasonable cause?  

Is there anything else which needs to be done?

Answer:
Kudos! Very well said and not much more to add here. Just remember to attach a note to each Form 5329 that’s filed – for each brother for each year of missed RMDs as you noted above – explaining the circumstances surrounding the error.

2.

Every year, I contribute $5,500 to a traditional IRA (non-deductible) with the intention to convert the funds to a Roth IRA (backdoor conversion) after they have matured in the account for a few months (to avoid a step transaction). I have no traditional IRAs, other than the one that is funded each year and subsequently converted. As a result of recent market performance, the account is now worth about $4,500.

To maximize the amount I backdoor into a Roth IRA, I would now like to withdraw all of the funds from the traditional IRA. I presume that the distribution will be tax free because no deduction for the original contribution was taken and no earnings are associated with contributed amounts.  Thereafter, I would contribute $5,500 for the 2016 calendar year to another non-deductible traditional IRA, let the funds stew for a few months, then convert the funds to a Roth IRA before year-end.

My understanding is that the above is doable without any adverse tax consequences (i.e., no tax whatsoever). Is that correct?  Furthermore, the losses I incur after liquidating the traditional IRA could be deducted as a miscellaneous deduction subject to the 2% floor.

Regards,

Chris

Answer:
Although a distribution of your non-deductible IRA contributions would be tax-free, you might want to rethink that decision. Instead of just withdrawing them, why not stick to your initial plan of making a conversion? Whether you withdraw the funds or convert them, your potential deductible loss is the same, so you might as well get the money into a Roth IRA. Also, keep in mind that a lot of IRA reporting is concerned with year-end values. Thus, if you add money to an IRA before the end of 2016, you may eliminate any loss you would have otherwise been able to claim.

3.

Hi Ed,

I have a very small S-Corp where I am the only employee with a very modest salary. Last year I started SEP contributions.

Is it acceptable to the IRS for the S-Corp to make a contribution (the full 25% limit of my future yearly wages) at the beginning of each year?  Or does the S-Corporation need to wait until the wages are actually paid before it can make the SEP contribution? I am assuming that the SEP is similar to an IRA where contributions can be made during the year before the tax/calendar year has ended.

In other words, can the S-Corp make the full 25% contribution during the first quarter of the year for the anticipated wages of the entire year that ends on December 31?

Also, do I run into any issues if I convert the SEP to a Roth IRA? I know that you have said that there is a required holding period for a SIMPLE IRA conversion, but there isn’t such a holding period for a SEP.

I would like to convert the SEP to a Roth each year, but I wanted to make sure that I wasn’t creating any issues if I do a conversion each and every year.

Thank you for you time and all of your helpful questions and answers.

Answer:
You can make your 2016 SEP contributions at any time in 2016, or in 2017 up until the business tax filing deadline (plus extensions). However, the reason people often wait until the year is over to make such contributions is because your maximum SEP contribution is based upon your 2016 compensation. In many cases, that’s an unknown until the year has actually come to an end. Valid SEP contributions can be converted to a Roth IRA at any time. There is no waiting period. If you’re planning on making your 2016 SEP contribution now, it’s best to be a bit conservative on your projected 2016 compensation. You can always “top off” your 2016 contribution when you file your 2016 return next year and get exact numbers.