RMD and TPA Fees

[commishvp]

Here is the scenario . . . Owner A is due an $872 RMD . . . our fee is $125. So client withdraws $872 from the plan, pays us $125, withholds $74.70 (10% of RMD net fee) and pays Owner A $672.30. Does this satisfy Owner A's RMD obligation?

Thanks for the help.

[BG5150]

What's the 1099-R gonna say? (it better say $872)

I would have w/held 10% on 872.

Why wasn't the fee done separately? Basically the owner is paying taxes on the fee.

[Lou S.]

I agree with BG5150 but I will say even in our office there is some disagreement, my boss thinks it should be done the way the OP describes.

[commishvp]

1099 was for $747. . . Why couldn't the participant pay the fee pre-tax?

[Bill Presson]

1099 was for $747. . . Why couldn't the participant pay the fee pre-tax?

He can if the fee comes out of his account and doesn't reduce his RMD. The RMD is designed to impose taxes on the tax deferred accounts at some point in time. Reducing an RMD defeats that purpose.

[BG5150]

1099 was for $747. . . Why couldn't the participant pay the fee pre-tax?

If his RMD is for $872, he should have $872 in taxable income. (unless there was some basis distributed, and since it wasn't mentioned, I'll assume there was none).

[ESOP Guy]

1099 was for $747. . . Why couldn't the participant pay the fee pre-tax?

If his RMD is for $872, he should have $872 in taxable income. (unless there was some basis distributed, and since it wasn't mentioned, I'll assume there was none).

Yup, I am going with the 1099-R has to show the full $872 as taxable. That is the point of the RMDs as pointed out by others.

[dkamikawa]

I'd have to agree with the majority that $872 should be the amount in box 2a(taxable amount). I'd be curious as to arguments about what can be put in box 1 if the fees were handled pre-tax.

In the OP's example, $997 should be taken from the participant's account ($872rmd + $125 fee). Our company would normally put $872 into box 1 and box 2a and call it a day. However, I have seen Penchecks put $997 into box 1 and $872 into box 2a.

I kind of like how they do it. Comments?

Keep in mind how distributions are reported on the 5500 please.

[jpod]

The RMD was $872 and it was paid, so the taxable amount is $872, and the w/h should have been 10% of that. the fee is an expense charged to him out of the proceeds of the distribution. He may or may not be able to claim a tax deduction for the fee, but that's not relevant for 1099-R reporting. I don't see the logic of requiring that the RMD amount be grossed up to cover the fee; it would be better to take the fee out of his account separately so that there is no 1099-R reporting of the fee and no tax w/h on the fee. Am I viewing this too simplistically? Quite a conundrum if the RMD was so small that there wasn't enough to cover the fee and the tax w/h, but we don't have that here. As an aside, $125 sounds a "bit" high to me. Anyone feel differently?

[dkamikawa]

jpod, i'm not quite sure what you are saying in your post. I believe you agree with the grossing up of the fee but are just handling it differently.

Instead of taking out the distribution amount of $872 and the fee of $125 as a single transaction, you are saying that it would be better to split them up. Am I interpreting this correctly? If you are in control of the preparation of the 1099-R, then it shouldn't matter if you do this separately or as one transaction. You would end up putting $872 as the taxable amount either way

I agree that the $125 fee sounds steep.

[GMK]

The RMD is $872, so the withholding should be $87.20.

I'd take the fee out of the account separately and pre-tax, so the participant receives the $784.80 after withholding.

dkamikawa - how much does Penchecks withhold when they put $997 in Box 1? Do they issue 1099's for other fees (other than distribution fees) that are taken from participant accounts?

If we were charged $125 per distribution, we'd be in the market for a change. But that's just cheapo me.

[dkamikawa]

Penchecks bases their withholding off of what is in box 2a. I am looking at a 1099-R which has the following information:

box 1 gross distribution- 1663.57

box 2a taxable amount- 1543.57

box 4 federal income tax withheld - 308.71 (not rmd so regular 20% federal withholding)

the $120 difference between box 1 and box 2a is based off of a $85 distribution fee + $35 rush processing fee.

[dkamikawa]

I asked Penchecks about the 1099-R and how they report the numbers and this is what they said:

We list the gross amount that comes to us. It is not the taxable amount but it is the gross coming to us. In years past we did enter the "Net" but our CFO, who worked for the IRS before coming to us said we should not do it that way so we changed to the current way.