Missed RMD and balance rolled out of plan

[khr]

A participant rolled over his entire balance to an IRA in 2019 without taking his RMD prior to the rollover.

He will be taking the RMD now as it was just discovered.

Is the only course of action to remedy the missed RMD by filing through VCP?

[Belgarath]

Here's an older thread that may be helpful.

 

[Bri]

My vote is for:

1.  Fix the 1099-R from the plan for 2019, as there should be one for the proper rollover amount, and one for the RMD amount due as a taxable payment.

2. The RMD payment was an ineligible rollover contribution to the IRA, so pay that penalty tax due for that, if any, and get it out (as adjusted for earnings) from the IRA.

 

[Luke Bailey]

And as an individual he or she needs to file Form 5330 following the instructions to request relief from the 50% excise tax.

[ALS]

I realize you're supposed to correct the 1099-R into two...one for the rollover and one for the RMD as a taxable payment per the 1099-R instructions. So the participant will pay taxes on what should have been the RMD. Now, when the IRA removes it (with earnings) how does the reporting for that work so that the participant doesn't get two 1099-Rs for the RMD?

[Luke Bailey]

Maybe the IRA 1099-R should use Code P?

[ALS]

What if it got rolled to another qualified plan and that plan had to distribute it? Looking at the 1099-R instructions, is P only for IRAs to use? I've never fully understood how this should work so that the participant doesn't get two taxable 1099-Rs.

[Luke Bailey]

ALS, my thought was that the plan would issue two corrected 1099-R's for 2019, as you explained in your last post, to show that a portion was taxable RMD and not eligible for rollover, and then the IRA would report its distribution as an excess that was subject to tax in 2019, per the plan 1099-R.

[Appleby]

On 8/28/2020 at 5:10 PM, Luke Bailey said:

ALS, my thought was that the plan would issue two corrected 1099-R's for 2019, as you explained in your last post, to show that a portion was taxable RMD and not eligible for rollover, and then the IRA would report its distribution as an excess that was subject to tax in 2019, per the plan 1099-R.

Right.  Assuming the individual filed his/her tax return by the due date, the deadline for correcting the ineligible rollover is October 15, 2020. Meeting this deadline means that the 6% excise tax is avoided. Any net income attributable (NIA) must be included. Some custodians will calculate the NIA. if this IRA custodian won't, the instructions in IRS Pub 590 can be used - Page 32 of the 2019 version https://www.irs.gov/pub/irs-pdf/p590a.pdf

1099-R should show return of excess as nontaxable. Earnings would be taxable in 2019- indicated by a Code P in box 7.