Trade date v settlement date IRS rules

[sonomadan]

I implemented a normal distribution from my IRA with Vanguard. The Activity tab shows Trade date of 12/28/22  They also list it as 1/3/23. I called them and they said it's reportable in 2023.

What are the IRS rules for this sale?

Is it a taxable event in 2022 or 2023? Specific IRS guidance is requested.

Do they simply refer to the SEC rules for Form 13F?

In Dec, I believed that I understood the rules for this and now Vanguard is saying it's different.

I have a situation wherein I need the distribution to be in 2022.

[MonikaK1]

If your brokerage determined that the distribution was made in 2023 and will report it on a 2023 Form 1099-R, and this was meant to be a Required Minimum Distribution for 2022, you will need to report a missed RMD and file Form 5329, either with your 2022 return or separately and include a statement explaining the reason for the missed distribution. 

You may be able to get the penalty waived if you missed taking your RMD due to an error by the financial institution. You'll calculate that penalty in Part 9 of Form 5329. To request a waiver, enter “RC” (for reasonable cause) and the amount of shortfall you want to be waived on the dotted line next to Line 54.

The IRS will match Form 1099-R with the information reported on the tax return for the year the form is filed with them.

See this tax tips article for more information about Form 5329. See also the discussion in this thread for options on how to complete and submit the form.

[sonomadan]

Thanks for the rapid response. This was not an RMD. I needed to take out some money and I needed it to be in 2022.  This was from a Vanguard, Mutual Fund IRA. I don't have RMDs yet. I'm 70, so the 59 1/2 rule doesn't apply.  I'm looking for IRS authoritative guidance that says that when I sent the Sell order, for a normal distribution, that the year the order to sell was made, is the year in which it is taxable, and not the Settlement Date nor the Distribution Date. 

The best I've been able to come up with is Securities and Exchange Commission guidance for their Form 13F, but their guidance for that form states it's not for IRAs.

Any help is appreciated.

[Mike9241]

those dates have nothing to do with the RMD. it's the date the funds actually come out of the IRA to you or to any taxable account. for example a taxable account at Vanguard.  generally, funds don't transfer until the settlement date or later. 

if this was a taxable account and a gain, it would be reportable in 2022 - trade date 

[saisteven]

I had the same problem with Vanguard before. Luckily they corrected it for me after I escalated it. The trade date determines the tax year, not the settlement date.

Vanguard's system is unreliable and some of their representatives do not have enough knowledge. 

[sonomadan]

Here's what I've found out and it relates to my situation stated above: Pub 509-B (For use in preparing 2022 returns), page 14, states "In general, distributions from a traditional IRA are taxable in the year you receive them."  It goes on to state:

"Exceptions. Exceptions to distributions from traditional
IRAs being taxable in the year you receive them are:
• Rollovers (see chapter 1 of Pub. 590-A);
•
Qualified charitable distributions, discussed later;
• Tax-free withdrawals of contributions (see chapter 1 of
Pub. 590-A); and
• The return of nondeductible contributions"

All those high-fallutin tax "specialists", on the Web who say it's the Trade Date, are wrong. 

After talking (loudly) with the agent at Vanguard, he gave me this pub as their foundation for using the dates I gave, above, for their 1099s to me.

All my future trades, near the end of the year, will bear a 10-day margin, from now on. This issue cost me $1000s.

Good luck to all.

[saisteven]

Very useful information. My IRA distribution in question was a Roth conversion, so it's considered a rollover (per page 22 of IRS Publication 590-A for 2022 tax year, the latest version available on IRS website). Therefore, it met one of the exceptions shown in Publication 590-B and Vanguard had to include those conversions in 2023 even though it settled in 2024. Vanguard did issue me a corrected 1099-R after I brought up the issue. Luckily, I hadn't filed tax returns yet.

It's different for RMD calculation. Since that Roth conversion settled in 2024, its value must be included in the 2023 year-end IRA account value.

10-day margin you mentioned about is terrible! I don't know why it takes Vanguard so long to settle trades. Some of my Vanguard mutual fund trades took 8 days to settle. That makes my year-end tax planning very difficult as I would not know if I have taken enough RMD or reached my Roth conversion goal.

Vanguard is supposed to settle mutual fund trades on T+1 and stock/ETF trades on T+2.  It takes Schwab and Fidelity 1 to 2 business days to settle trades. I wonder if Vanguard violates the SEC regulations here.

[sonomadan]

The 10 day margin I mentioned was my own, self-imposed limit. I may, or may not, waffle on its length. It will depend on how many business days exist at the end of any particular year. The gov't is about to implement a settlement date requirement of T+1, in a couple of months. That may change my margin window. It will depend on how many business days are left in any particular year. I guess, if I had done my extreme due diligence, I wouldn't have been caught short. Ya live, ya learn, ya make/lose money. 

Good luck to all.

[r8b8rt8cl8s8n]

I have the same problem and have gotten nowhere after escalation to the office of CEO.  How did you get them to change your tax year?

[fanfare]

The exception bullet list above means that the money is not taxable. (therefore the year does not matter)

Being on the list cannot be used to change the date of the distribution.

If settlement is on a business day in the New Year, the distribution will take place in the new year, it seems to me.

You can't distribute funds you don't have.

[saisteven]

Roth conversions are taxable events, so tax year does matter. The year-end Roth conversion amount should be included in the year you submit the conversion trade order, not the next year in which it settles.