How an Expert Botched Her Own RMD
Track IRA transactions like a hawk, from start to finish, to make sure they are carried out completely and correctly.
This shouldn't happen but it did: I messed up my own required minimum distribution for 2017.
I started out doing everything right. Following my own advice, I started my qualified charitable contributions early. In August, I sent my IRA provider a request for nine distribution checks, to be paid from the IRA in specified amounts to nine specified charities. The IRA provider cut the checks and, as requested, mailed them to me to be sent along to the charities.
By September, I had mailed all nine checks to the respective charities, requesting that each one send me the required tax receipt. I dutifully created a chart, to track and record as each charity's receipt and acknowledgment of the gift was returned to me.
The chart soon filled up with "yes" (receipt returned) ... or rather it almost filled up. There was one blank space on the chart. I would notice that blank space from time to time and think, I've got to follow up and see what happened to that receipt. I assumed the charity had just not sent one, or they'd sent it and I'd forgotten to record it. Whatever the problem was I would take care of it someday, maybe when preparing my tax return in the spring of 2018.
Then in February I got a notice from my IRA provider. Since the $500 check to XYZ Charity had never been cashed, and was now stale, they had stopped payment on the check and restored the $500 to my IRA. Furthermore, since that $500 had been deducted from my account in 2017 but now was being restored, they would increase my Dec. 31, 2017, account balance by $500 and file an amended Form 5498 with the IRS.
A simple phone call to the charity revealed that they had never received the check I sent in September.
But I had counted that $500 QCD as part of my 2017 required minimum distribution. Now with the distribution being retroactively "undistributed," I was $500 short on my 2017 RMD. Penalty: $250!
There followed a frantic and time consuming process to fix this. First, I got the IRA provider to issue a new check and (this time) send it directly to the charity. I talked to the charity on a daily basis until they finally received that replacement check. They emailed me the tax receipt. (Of course it's dated 2018 not 2017, but that can't be changed.)
Then I prepared Form 5329, asking the IRS to waive the 50% excise tax on my $500 shortfall for reasonable cause. The reasonable cause for missing the RMD was my failure to anticipate that a properly drawn check mailed to the correct address might never reach its destination. I remedied the shortfall by getting the distribution re-sent to the charity in early 2018. I will have to compute the income on this "shortfall amount" (the income my IRA earned on the $500 after it was restored to my account and before it was re-distributed to the charity) and withdraw that, too, in order to qualify for an IRS waiver of the 50% excise tax.
Whatever happened to the original check? Did the post office lose it? Did my dog eat it? Did the charity's dog eat it? We'll never know. If only I'd made that simple phone call to the charity in October 2017 instead of April 2018, the problem could have been fixed well before the year end.
Lesson learned. As I teach in my seminars and should probably do when managing my own affairs: Track IRA transactions like a hawk, from start to finish, to make sure they are carried out completely and correctly. Don't just send in the paperwork, go on vacation, and hope for the best. Assume the worst until you have a complete and correct paper trail in your hands.
Where to read more: For complete explanation of qualified charitable distributions from IRAs, see Natalie Choate's Special Report: Charitable Giving with Retirement Benefits. Regarding how to request a waiver of the 50% excise tax on an excess IRA accumulation (failure to take a required minimum distribution), see Special Report: IRA Mistakes and How to Fix Them. Both of these downloadable special reports are available for purchase at https://www.ataxplan.com/special‑reports/.
Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits.The views expressed in this article may or may not reflect the views of Morningstar. The electronic version of Natalie’s book, Life and Death Planning for Retirement Benefits, is now on a new platform with expanded features. The e-book gives you the entire book in word-searchable format, plus two chapters (on life insurance and annuities in retirement plans). Visit www.retirementbenefitsplanning.net to subscribe or learn more.