Uncashed IRA Distribution Check? Here’s What to Do

Generally, a distribution from an IRA is treated as income for the year the amount leaves the IRA. However, an uncashed check could cause different results, depending on who writes the check. If it is the IRA custodian, the tax impact is not affected. But if the IRA owner writes the check and it is uncashed by year-end, that would mean including the amount in income for a different year than planned.

IRA Distribution Checks Issued by the Custodian

If an IRA custodian issues a check for a properly authorized or requested distribution, that distribution remains on their books and records for the year the check was issued and must be reported as a distribution for that year. This tax-reporting requirement remains even if the check is uncashed.

Example: 75-year-old Darlene contacted her IRA custodian in December 2023 and provided proper instructions for a distribution of $50,000.

$40,000 of the $50,000 is Darlene’s required minimum distribution, or RMD, for 2023 and, therefore, must be distributed from her IRA by Dec. 31, 2023.

Darlene’s IRA custodian issued a check for $50,000 on Dec. 18, 2023, and mailed it to the address of record that it had on file.

Darlene had recently changed her address and failed to notify her IRA custodian, so the check was sent to her old address.

In January, Darlene contacted her IRA custodian and requested that it reissue the check, as it was apparent by then that it had been lost.

Her IRA custodian reissued the check on Jan. 15, 2024, and Darlene received and cashed it a few days later.

Did the Stopped IRA Distribution Check Cause Darlene to Miss Her RMD Deadline?

No. When Darlene’s IRA custodian stopped the check, the stop did not reverse the distribution. But the cash was available from the uncashed check. This cash covered the new check reissued to Darlene in January 2024.

Typical Resulting Activity

The check was issued for $50,000 in December 2023 and represents a distribution for 2023.

When this check was stopped in January 2024, the IRA custodian credited the $50,000 to Darlene’s account. This credit is nonreportable and should not be reported on Darlene’s tax return.

When the check was reissued for the $50,000 in January, that $50,000 was issued from the funds generated by the credit. This reissued check is a nonreportable transaction, ensuring that Darlene is not taxed twice on the amount.

Darlene’s IRA custodian must issue IRS Form 1099-R for $50,000 for 2023, and she must include the amount in her income on her 2023 tax return.

When Taxes Are Withheld, and the IRA Distribution Check Is Stopped

An IRA owner can elect to have taxes withheld from their distribution. These tax withholding amounts are not reversed when a check is stopped or voided for valid distributions. Instead, the amount remains a tax payment to the IRS (and state if state taxes were withheld).

Example: Darlene had 10% withheld for federal income tax ($5,000). Therefore, the check issued to her was for $45,000.

When her IRA custodian voided the missing check, $45,000 would have been credited to her IRA.

The amount paid for federal taxes would have remained as paid to the IRS.

When her custodian issued the replacement check in January, it would be for $45,000.

IRA Distribution Checks Written by Owners Cause Negative Consequences

Some IRA custodians provide check-writing capabilities for some of their IRA owners. This check-writing capability allows IRA owners to make distributions from their IRAs without contacting their IRA custodians. While having check-writing capability for one’s IRA can be a welcome convenience, it can result in nondistributions for uncashed checks and cause the IRA owner to miss the deadline for taking planned distributions.

Example: 77-year-old Tom has been using his IRA checkbook to take his RMD since he was 70 ½, and all has been going well. In 2023, Tom decided to make a qualified charitable distribution, or QCD, to his favorite charity for $100,000, which would count as his 2023 RMD.

While Tom hand-delivered the check to the charity in December 2023, he realized it was uncashed when he reviewed his account statement in February 2024.

When he contacted the charity, they explained that they deposited checks every few months due to the low volume and, therefore, had not yet deposited his check. At Tom’s insistence, the charity deposited the check into their account in February 2024.

The Issue: Tom Missed His RMD Deadline

Tom missed the deadline for taking his 2023 RMD because the check did not clear his account by Dec. 31, 2023.

Tom’s Check Represents a Distribution for 2024

Even though Tom wrote the check in 2023, it created a distribution for 2024 because the amount cleared his IRA in 2024.

Tom’s IRA custodian must issue a Form 1099-R for the $100,000 for 2024, and Tom must report the $100,000 on his 2024 tax return. However, if it qualifies as a QCD, it would be excluded from his income.

Tom Owes the IRS an Excise Tax of 10%

The excise tax for missing an RMD deadline is 25%. However, this is reduced to 10% if the shortfall is timely corrected, which Tom did when the check was cleared from his IRA in February,

Tom’s tax preparer must file IRS Form 5329 to report the shortfall and calculate the excise tax. The tax preparer may also request a waiver of the excise tax when filing Form 5329 because the deadline was missed because of reasonable error.

Tips for Avoiding This Problem

In Darlene’s case, the solution is as easy as sending the funds via ACH or federal funds directly to her bank account and ensuring that her IRA custodian updates her address of record. But there are negative consequences for Tom.

Tom missed his RMD deadline and now owes the IRS an excise tax on the amount. To prevent this from reoccurring, Tom must have his IRA custodian issue future distribution checks from his IRA. If he still prefers to write checks, he must ensure that his payees cash them when they receive them.

Was Your IRA Distribution Check Cashed?

Many IRA owners assume that IRA transactions they initiate are processed. But that is not always the case. One example is uncashed checks written on the IRA. Uncashed distribution checks could determine when the amount is included in the IRA owner’s income. Tom must include his 2023 and 2024 RMDs in his 2024 income. If these amounts were taxable, they could affect the rate at which the amounts are taxed.

Having the IRA custodian issue checks is a safer method. Nevertheless, IRA owners should review their account statements and contact their IRA custodians immediately after discovering that transactions are missing.