One-time change to RMD Method
L1: One-time change to RMD MethodI am trying to confirm the ‘rules’ that apply when you change from annuitization or amortization calcuation methods to the RMD method during a SEPP. I work with older clients (50+), and I think they are getting some incorrect advice from their financial management firm(s). This will help me steer them to professional assistance.
Here are my questions:
1-Once you make the change to the RMD method, my understanding is that you must then recalculate the annual distribution amount each year, just as you would if you had been using the RMD method all along. Is that correct?
2-At the point in time when you make the decision to change to the RMD method, what account balance do you use as your basis for tne new calculation?
-The current balance (balance as of the date of the change)?
-The balance as of the end of the previous year?
-Or a “reasonable date” as defined in Rev. Rul. 2002-62 (Section 2-Methods, .02-Other Rules, paragraph (d) Account Balance)?
3-If in a given year the annual amount to be distributed was miscalculated (by the firm handling the account not by the taxpayer), and as a result there was an “under distribution,” can this be handled the same way as suggested for traditional IRA RMD “under distribution” situations?
-In other words, can you submit Form 5329, pay the 50% additional penalty tax, and withdraw enough additional funds to make up the missing amount?
-Or have you busted the plan and must pay the 10% plus associated penalties on the total amounts withdrawn?
4-From a reporting perspective, assuming that the 5329/Excise tax process can be used to address a prior year “under distribution,” what paperwork do you have to do to make sure that the next year you don’t get unfairly accused of an “over distribution” (the correct annual RMD distribution plus the amount of corrective withdrawal you did to true up for the prior year error)?
-Do you use the 5329 process to explain and claim the exception distribution code 02 for all the funds?
-Would a custodian be able to use a 1099R code 02 for all the funds distributed if the cause is as explained above, or would they have to give you a code 01 which thus requires the 5329 (the custodian is one who currently uses the code 02 on its 1099Rs)?
-Or is this a case where they would issue two 1099Rs, one with an 02 for the current year SEPP and a second one for the funds distributed to “catch up” with (probably) a code 01?
PS-When I say “work with … clients” I mean I do some volunteer work helping some folks organize their finances so they can be sure they’re keeping on top of bill paying, tax filing, and so forth. I do not offer professional advice but I do try to help them identify when and why they might need it.2012-03-19 07:06, By: WhyMe, IP: [220.127.116.11]