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Putting Required Minimum Distributions On The Advisor's Checklist

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Financial advisors say is extremely important to add the following item to their client checklists for the Fall season: “Make sure clients take their required minimum distributions from qualified retirement accounts and IRAs.”

Advisors say they go to all lengths to underscore the importance of making sure these distributions are made in a timely and proper way.

There is a 50% penalty on the amount not distributed as required, they point out, and clients are also subject to violation of the Internal Revenue Code. These are strong incentives to do what it takes to check on clients’ compliance, advisors stress.

The Internal Revenue Service outlines these requirements in Publication 590, Individual Retirement Arrangements. The IRS offers this as guidance in preparing 2007 tax returns. (See chart.)

To avoid client missteps, financial advisors offered their suggestions for making sure RMDs are taken.

Starting November 1, it becomes a priority to check and make sure that clients have taken the proper distribution from their qualified plans, according to Ramsey Bova, a certified financial planner with Money Watch Advisors, Lexington, Ky. “I make sure clients are taking these distributions even if it means going out to the client’s house,” she says.

Not only does Bova check with her clients but she says she also checks to make sure brokerage firms that send statements correctly calculate the RMD. She says she checks it 3 times, as a matter of fact.

The trustee, custodian or issuer that held the IRA at the end of the preceding year in which the distribution is required has to report the RMD total to the client or offer to calculate it, she adds.

The report must include the date by which the distribution must be taken and must be received by January 31 of the year in which distribution must be taken or provided with a year-end statement, Bova continues. However, she adds, “I personally don’t like this caveat because many people do not review their statements very carefully.”

Dawn Brown, a financial planner with L.J. Altfest & Co., New York, recommends sending RMD communications to clients from about June to July. These communications should inform them of the amount of the RMD. A follow-up call should be made to ensure that the paperwork was received and that the client is aware of the amount to be withdrawn, she adds.

If the client decides to withdraw funds in the latter part of the year, then a reminder call should be made in November, she adds.

“Every September, we send a letter to those who are going to be 70-1/2 or are taking an RMD already,” says Kim Bourassa, client service account specialist with Merriman Berkman Next, in Seattle. If a system is available, the client should have the RMD automatically withdrawn annually, she suggests.

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.


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