Rollover of RMD

[Guest JROSSITTER]

A participant who is subject to RMD requirement rolled over his total QP distribution to an IRA and then took his QP and IRA RMDs from the IRA.

What is the likely penalty? 50% of QP RMD? Inclusion of the QP RMD in income (along with the full IRA distribution)? 6% of the QP RMD as an excess IRA contribution? No harm, no foul?

I think 6% is the answer, and that this could be cured by a withdrawal from the IRA of the QP RMD, plus earnings, before 4/15 of next year. It would seem then that the full IRA withdrawal would be taxable this year, but only the earnings on the “excess contribution” would be taxable on the corrective distribution.

Any thoughts on this would be appreciated.

[Guest JROSSITTER]

I think now that my “solution” is unfair, and even though life and tax law are frequently unfair, there must be a better one. Even if the corrective distribution (other than earnings) is not taxed—so that there would not be double taxation of the same amount—this would still result in an “excess/double distribution.” Could the owner instead request that the IRA FI reverse the rollover—return the excess contribution + earnings—so that the portion of the IRA distribution attributable to the QP RMD would neither be reported as a distribution nor as a rollover contribution?

[jevd]

My understanding is that the RMD rolled over is considered an excess and must be removed before tax filing date for the year or suffer a 6% penalty. The distribution from the QP satisfied the RMD for the QP so no 50% penalty.

If the excess rollover amount is removed before tax filing it requires earnings to be removed which are taxable but no penalty is assessed.

If the correction occurs after extended tax filing date (btw no actual extension is required) no earnings are removed but the 6% penalty applies.

See 408(d)(4) &(5)

below

IRC 408(d)

(4) Contributions returned before due date of return

Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if—

(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year,

(B) no deduction is allowed under section 219 with respect to such contribution, and

© such distribution is accompanied by the amount of net income attributable to such contribution.

In the case of such a distribution, for purposes of section 61, any net income described in subparagraph © shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.

(5) Distributions of excess contributions after due date for taxable year and certain excess rollover contributions

(A) In general

In the case of any individual, if the aggregate contributions (other than rollover contributions) paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under section 219 (b)(1)(A), paragraph (1) shall not apply to the distribution of any such contribution to the extent that such contribution exceeds the amount allowable as a deduction under section 219 for the taxable year for which the contribution was paid—

(i) if such distribution is received after the date described in paragraph (4),

(ii) but only to the extent that no deduction has been allowed under section 219 with respect to such excess contribution.

If employer contributions on behalf of the individual are paid for the taxable year to a simplified employee pension, the dollar limitation of the preceding sentence shall be increased by the lesser of the amount of such contributions or the dollar limitation in effect under section 415 ©(1)(A) for such taxable year.

(B) Excess rollover contributions attributable to erroneous information

If—

(i) the taxpayer reasonably relies on information supplied pursuant to subtitle F for determining the amount of a rollover contribution, but

(ii) the information was erroneous,

subparagraph (A) shall be applied by increasing the dollar limit set forth therein by that portion of the excess contribution which was attributable to such information.

For purposes of this paragraph, the amount allowable as a deduction under section 219 shall be computed without regard to section 219 (g).

[DTH]

Treasury regulation 1.402©-2 provides that an MRD is not eligible for rollover. Q&A 7, provides that the MRD must be paid from the plan first. The plan should have paid the MRD first before distributing the rest of the money from the plan (the participant cannot defer the MRD to 12/31 or, if applicable 4/1). The IRS' reasoning is the accepting institution will not have the prior year 12/31 account balance to determine the MRD for the distribution calendar year. Many participants try to convince the distributing plan that they will give the prior year 12/31 account balance information to the IRA or other eligible employer plan to extend the MRD for one more year.

Additionally, the Form 1099-R instructions require the MRD to be reported as income. Refer to the 2005 1099-R instructions page R-8:

Corrected Form 1099-R

If you filed a Form 1099-R with the IRS and later discover that there is an error on it, you must correct it as soon as possible. For example, if you transmit a direct rollover and file a Form 1099-R with the IRS reporting that none of the direct rollover is taxable by entering 0 (zero) in box 2a, and you then discover that part of the direct rollover consists of required minimum distributions under section 401(a)(9), you must file a corrected Form 1099-R.

[Appleby]

Just to add to jevd's response...…If the amount was rolled to the IRA this year ( 2005), it must be removed by the individuals tax filing deadline ( usually April 15) …if the individual filed his/her tax return by April 15 or file for an extension by April 15, the deadline for removing the excess extends to October 15,2006.

[jevd]

Appleby

My understanding is that you don't need an extension. See instructions for form 5329. See page 4.

[Appleby]

Right- a tax filing extension is not required. However, if the IRA owner filed his/her tax return by April 15…he/she receives an automatic extension of 6-months to remove the excess. Also, if the individual files for an extension to file his tax return, and files the return by the deadline of the extension ( usually August), the automatic 6-months extension from April 15 still stands for purposes of removing the excess…In summary, if the tax return is filed by the due date , including extension, the deadline to remove the excess is October 15. …otherwise, the deadline to remove the excess is April 15.

[saabraa]

Do the Form 5329 instructions contain an error at the bottom of page 3? If you look at the last full paragraph's last sentence, it says to not treat rollovers as an excess contribution. Maybe should have said, "Do not treat valid/allowable rollovers as an excess contribution."

[Guest JROSSITTER]

I think this has come into focus. Where I was going wrong was thinking that an additional distribution = the excess contribution + earnings would be needed. However, since there has already been a 2005 distribution from the IRA = to the dollar amount of the IRA RMD + the dollar amount of the QP RMD, the only additional distribution needed is of the earnings on excess contribution/ineligible rollover. In other words, the original distribution from the QP satisfied its RMD requirement; the rollover only shielded from tax the amount in excess of the QP RMD amount; the rollover of the balance was an excess contribution which may be corrected as noted above; the subsequent distribution(s) from the IRA have done this, except for the remaining earnings on the excess contribution. This makes sense since the only thing gained by the improper rollover was a continued/longer deferral of the earnings on the QP RMD amount than would have been the case if it was handled properly.