• MISSED RMDS AND RETIREMENT PLAN ROLLOVERS: TODAY'S SLOTT REPORT MAILBAG

  • By Andy Ives, CFP®, AIF®
    IRA Analyst

    Question:

    Hello,

    I have a question for a situation I have never come across before.  I have a client that just found out they missed taking their RMD’s from one of their retirement accounts for the last 5 years!  Assuming they take the missed distributions in March 2019, what form will the broker report this on?  Will it be a Form 1099-R for 2019?  Or will he get a corrected Form 1099-R for 2015, 2016, 2017…?  Also, what code will be used in box 7 to indicate that this is a correction of the missed RMD’s?  Thank you for any help you can give!

    Regards,

    Deborah

    Answer:

    Deborah,

    Missing RMDs is a common occurrence and there is a definitive fix. The missed RMD should be taken as soon as possible. The RMD will be taxable in the year it is withdrawn, so the missed RMDs will all be included on the 2019 Form 1099-R. (Missed RMDs are NOT taxable for the year they were due, so there will be no corrected 1099-Rs for previous years.) Some experts recommend doing separate withdrawals for each year’s RMD, although this is not required. As for Box 7 on the 1099-R, Code 7 for a “Normal distribution” will be used. It is up to the account owner to self-report their error and attempt to have the 50% excess accumulation penalty waived.

    After the RMDs are taken, the mistake needs to be reported to the IRS. There is no need to amend previous income tax filings. Instead, the mistake is reported to the IRS on Form 5329. The version of Form 5329 for the year the RMD was missed must be used. The 50% penalty waiver is handled by filling out Part IX of Form 5329. Form 5329 will need to be filed for each year.

    Attach a note to Form 5329 explaining that you have made up the missed RMD amount, the reason for the oversight and how you are making sure it doesn’t happen again. This statement doesn’t have to be extremely long. Keep it short and sweet. Many experts also recommend that a copy of the distribution check be attached to the statement as well.

    Finally, do not pay the penalty! Instead, wait for the IRS to inform the client whether the waiver request has been approved. If it’s denied, the IRS will send a notice requesting payment.

    Question:

    My wife has a Traditional IRA with an approximate balance of $200k. She has $22k of after-tax money in the account which has been properly tracked with Form 8606. She is newly employed with a company that offers a 401(k) plan that accepts rollovers, but will not accept after-tax dollars. My questions are as follows:

    1) Can she roll the $178k into the 401(k) plan in 2019 leaving only the $22k of after-tax funds in the Traditional IRA?

    2) If she does the above, leaving only after-tax money in the Traditional IRA, can she convert the $22k from the Traditional IRA in 2019 to a Roth IRA and avoid any tax liability associated with the conversion?

    Thanks in advance for your reply!

    Answer:

    Sir,

    Your wife’s new 401(k) will not accept her after-tax dollars as a rollover because after-tax money is not eligible to be rolled over from an IRA into a company plan. However, if the plan accepts pre-tax dollars (and it sounds like this plan will), then yes, she can roll over the $178,000 into the 401(k). As long as you maintained good records (i.e. Form 8606), and assuming she has no other IRA accounts with pre-tax dollars, then the remaining $22,000 can be converted to a Roth without generating any tax liability.

    https://www.irahelp.com/slottreport/missed-rmds-and-retirement-plan-rollovers-todays-slott-report-mailbag