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February 2022

Guidance – Missed 2021 RMD

Q-1. I have a client that did not take their 2021 RMD. They are now coming to us wanting us to fix it. They said that they signed up for an auto distribution but we do not have paperwork showing this. Is there any way to still do a 2021 distribution. What is the best way to handle this?

A-1. There is no way to show that the distribution occurred in 2021 if it did not. It would be tax fraud to report a distribution occurring in 2021. The law does not depend upon whether the client or the bank or both were at fault.

The individual should withdraw their 2021 RMD as soon as possible. The client will have two RMDs in 2021 because the person includes a distribution in their income in the year they receive the distribution.

The individual can ask the IRS to waive the 50% tax which applies when a person has an excess accumulation. That is, they failed to withdraw all of their RMD. The individual should read the instructions as set forth in the instructions for Form 5329. The individual is permitted to prepare this form showing that they do not owe the 50% tax amount because they are allowed to assume the IRS will waive the 50% penalty.

The individual must in writing request the waiver and explain why the IRS should grant the request. The individual if they truly believe it was the bank’s mistake may make that argument. The IRS is not required to waive the 50% tax.

The bank may furnish a letter to your client admitting fault or partial fault if there is some evidence the bank made an error. The client would attach the bank’s letter to their request for waiver.

Q-2. We have a situation that customers (husband and wife) of ours has IRA’s with us and Ameritrade. The husband passed away on September 22, 2021 and the wife was the beneficiary and transferred his IRA to her own, the transfer was done on September 27, 2021. In the past they have had Ameritrade take the RMD for all of the IRA’s so we have not done RMD’s for them in the past. After his death they wanted to combine all of the IRA’s into one place so they transferred his and her IRA’s with Ameritrade to us on November 22, 2021 at that time we were told and they signed a form that Ameritrade was going to meet the RMD for both places that we did not need to. Now this morning I received a call from their daughter, she was gathering all the information getting ready to take to the accountant, and she had the distribution form from Ameritrade and thought that it seemed low compared to past years. She phoned Ameritrade and apparently, they did not do the RMD for all their IRA’s just the ones for Ameritrade. So, they told her to call us and have us take the RMD for her and just make sure we adjust the May 31st forms.

A-1. She should withdraw the missed amount as soon as possible in 2022. The tax rule is - a person pays tax for the year the distribution(s) occur. She is unable to include the missed amount on her/their 2021 tax return. Her 2022 distribution amount will be larger by the missed amount.

She has the right to ask that the IRS waive the 50% tax because of the error made by Ameritrade.
She will want to file Form 5329 with her 2021 tax return. She should read the instructions for Form 5329 (Section IX) explaining how she can request the IRS waive the 50% tax. See the attached. She can complete the form to claim she does not owe the 50% tax.

She will want to attach a note of explanation and be sure to explain Ameritrade’s error. The form she signed for you stating that it was to taken at Ameritrade should also be attached. The bank should not revise any 2021 IRS reporting forms. This would be tax fraud.