Putting Required Minimum Distributions On The Advisor's Checklist

Elaine Scoggins, client experience director with Merriman Berkman Next in Seattle, says that legally, it is the taxpayer’s responsibility to take the correct distribution, but it is really the financial advisor’s responsibility to make sure the client is contacted and reminded of the RMD requirement.

John Smartt, a certified public accountant based in Knoxville, Tenn., says that currently he has nearly 20 clients with RMD requirements. Right after the Dec. 31 year-end reporting of Schedule D capital gain and loss information for clients who have taxable accounts, Smartt says he turns to RMDs. That’s when he starts contacting any clients who turn 70 1/2 during the year. Each client signs a form for the RMD, a process which is usually complete by mid-February.

Tom Davison, a certified financial planner with Summit Financial Strategies, Columbus, Ohio, said that, at his firm, there is a similar process in which clients who must take RMDs are assigned “action items.” When final year-end numbers are available for the qualified accounts, RMDs are calculated and entered into the system, he continues. If tax planning is not needed, he says he tries to get RMDs done by September so there are no year-end complications.

For some clients, Davison adds, authorization may be needed to complete RMDs. And, he adds, extra communication is needed so that when clients get their 5498 forms from their custodian in late spring, they do not think this new form is a change to the 1099 form they have already received.

Custodians must send Copy B of Form 5498 to the client by June 1, and furnish fair market value information and RMD, if applicable, by Feb. 2 of the same year, according to the IRS.

If due to oversight, an RMD is not taken by the required deadline, another IRS Form–Form 5329–says the filer should fill out lines 51-53 of the form, pay any taxes due and attach a statement explaining the oversight. The IRS will make a decision based on these steps.

The RMD must be taken, says the IRS.

“Sometimes the IRS will pardon an oversight if there is a good reason,” notes Brown. “If the reason is that you didn’t open the mail, that is not a good reason.”

Warren Ward, a certified financial planner with Warren Ward Associates, Columbus, Ind., says that a couple of people who have not taken distributions and have come to his firm for assistance have taken his firm’s recommendation to request a refund. In both cases, he continues, once they explained that they had made an error and that steps were taken to prevent another error, the refund was granted.

But planners need to be more careful, cautions Diane Pearson, a certified financial planner with Legend Financial, Pittsburgh, because the IRS is becoming more stringent.

So, in order to minimize the need to apply for a refund, Pearson suggests that the financial planner check the calculations sent to the client by the custodian and also pay attention to details such as making sure the planner is aware of any RMD qualified investments not being managed by the planner’s own firm, which can happen if the planner is not providing comprehensive financial planning services.