RMD reduced by prior year RMD

[poolcleaner]

My client failed to take all of the 2023 RMD from his IRA in 2023.  This was corrected in January 2024 by taking the remaining 2023 RMD plus earnings from January 1st through the date of withdrawal. Now the trustee (who was the culprit on the missing RMD)  has sent information to the client showing the correct 2024 RMD but subtracting the makeup 2023 distribution and its earnings to reduce the amount he needs to withdraw for the 2024 RMD. I think they are totally wrong in that calculation.  Am I correct? 

Another Former All Star

[abctax55]

Jane, I'm not good at math <w> but the 2024 RMD is based on the ending balance of the account a/o 12.31.23.   IF you have that figure, does the math work?

[rbynaker]

It sounds like someone is confusing a corrective distribution of an excess contribution with a missed RMD.

The 2024 RMD is calculated based on the FMV of the account on 12/31/23.

The missed 2023 RMD is reported on the 2023 Form 5329 Part IX with a waiver request for "reasonable cause" and $0 penalty (something perhaps more polite than "trustee action resulted in an ID10T error".)  All of my RC waiver requests include a statement that the missed RMD has been taken and procedures have been put in place to prevent the error for happening again.

I suspect the IRS may start pushing back on RC waivers now that the penalty is lower but I haven't seen that in practice yet.  Time will tell, until then I plan to continue requesting reasonable cause waivers.

Rick

Added: I started this then got a call from a client and see that Anna also chimed in with a similar response.

[poolcleaner]

I was afraid I should have entered some approximate numbers to make this clearer.  His RMD for 2023 was $52,000 and he only removed $23,000 during 2023.  In January 2024 he removed the missing $29,000 plus earnings of $450 for a total of $29,450.  The trustee (not exactly a small entity) notified him that his 2024 RMD is $55,000 but since he has already taken $29,450, he only needs to withdraw another $25,550 to satisfy his 2024 RMD. I think that would make him $29,450 short for 2024 and the cycle continues!

[BobKamman]

"The fault, dear Brutus , is not in our stars, But in ourselves . . ."

(Julius Caesar, Act 1, Scene 2)

IRA trustees have no obligation to force account owners to take their RMD.  For all they know, there is another IRA where distributions covered all accounts.  If you're going to blame anyone, blame the tax preparer. 

[abctax55]

"  ...  blame the tax preparer. 

Um... no.    Blame the preparer when the distribution should have been taken before the client even comes in for an appointment?  

[rbynaker]

Okay, so technically they're mostly correct.  In order to get the RC waiver of the 2023 penalty on the shortfall, my understanding is that you need to "make up" the missed 2023 distribution.  I've never interpreted that as being able to double-dip and use the same distribution for multiple year RMD calculations.  IMO you can use the Jan 2024 $29K to EITHER 1) request a waiver of the 2023 penalty OR 2) pay the 2023 penalty (now "only" 25%) and have the $29K count as part of the 2024 RMD.

Rick

[poolcleaner]

In prior years the trustee had issued checks to the client for him to write the QCD checks and then they sent the remaining RMD less IRS withholding to the client.  In 2023 the client sent the QCD checks out but the trustere failed to finish their part of the bargain.  Obviously client has some fault but not all of it!

[BobKamman]

I think you are confusing "trustee" with "commissioned salesperson who manages account held at trustee."

[poolcleaner]

That is always a possibility!.

[qbteachmt]

"The trustee (not exactly a small entity)"

I've had this happen by Schwab to the point that they sent a nice apology gift. It didn't help with taxes, of course. We removed all of the taxpayers' retirement accounts because of Schwab's error.

"but since he has already taken $29,450, he only needs to withdraw another $25,550"

Oh, wow. From AARP:

https://taxaideqa.aarp.org/hc/en-us/articles/360012329514-I-forgot-to-take-my-Required-Minimum-Distr...

"First: Contact the account custodian to take the late RMD now. Do this as a separate transaction rather than combining it with the RMD that is due for the current year. To have the additional tax waived, the error must be promptly corrected. Do not wait. Also, this late RMD does not replace this year’s RMD. That must still be taken and both will be included in this year’s taxable income."

Which is why I print and send stuff to these bonkers brokers quite often. They're supposed to be licensed; sheesh.

[BobKamman]

Did it happen with Schwab?  Or did it happen when the agent who uses Schwab as a clearing broker didn't follow through with advice and instructions?  Some of these mostly-unsupervised commission collectors have the broker statements sent to them, then they paste their name on them as the payer and forward those to the customer.  

And the salesperson might very well have told your client "this gift came from Schwab," because that's a good way to avoid admitting error.  

[PATAX]

@abctax55 I agree 100% with you Anna. It is not our job. It is the client's responsibility, the taxpayers responsibility. We do not get paid to manage their retirement accounts and we are not responsible if they do not take out the RMD. I can't believe Bob actually said that, maybe he was being sarcastic, it is hard for me to read him sometimes, but he is intelligent.

[qbteachmt]

"Did it happen with Schwab?  Or did it happen when the agent who uses Schwab as a clearing broker didn't follow through with advice and instructions?"

Oh, the poor reps at the local office were so overwhelmed, every time we came back to bring paperwork, printouts, and explanations, to see if things could be fixed "better" than how they broke it. The office doesn't even have a broker, and then they want to charge you for the broker on the conference call (nice try).

[PATAX]

@qbteachmt 👍 what a joke.

[qbteachmt]

"what a joke."

Final joke is on them. The Estate department seemed to have wiped out over 30-something years of gains with their computation of step up of basis, incorrectly. Made it very easy to start selling and moving assets. I just couldn't fight with them any longer 🙂

[BobKamman]

I didn't know that Schwab had franchise locations, but their Missoula branch website says

"Independent Branches are franchise branches and offer the same brokerage services and advice solutions as other Schwab branches."

---except they do it better, right, because everyone in Montana is above average?

[qbteachmt]

"because everyone in Montana is above average?"

It wasn't in MT. You're thinking of Lake Wobegon in Minnesota. MT is "The last best place."