IRA Distribution–IRS Tax Year Rule

[Quentin818]

Looking for the IRS definition as to when an IRA distribution is considered as made for tax year purposes. I have from a reliable source that, once funds are withdrawn and made unavailable (e.g., on Dec 31), that date is considered a distribution for tax purposes.
But, what if a brokerage waits a few days, does their processing, and then decides to reckon the tax year as that processing date? Seems to me that would violate IRS rules.
Wondering if the IRC or regs explicitly cover this.

[fanfare]

If your broker's processing procedures involve delays, your distribution could move into the next tax year.

Next time, leave some wiggle room.

If that makes you late, you have to deal with the IRS penalty, if any.

[Opus 17]

You receive money when it becomes available to you to spend.  That does not necessarily mean that a withdrawal can be said to occur on the day you request it, even though the requested funds are no longer available to you to invest.

I suspect that somewhere in the broker’s fine print there is a statement about transactions taking a few business days to settle.  As a result, if you try to claim income in a different year then is shown on the 1099 prepared by the broker, I think you would have a very difficult time making your case before the IRS.

To be specific, the IRS will be quite happy to allow you to declare additional income and pay additional tax for 2021. If you then fail to report the income for 2022, they will assess tax and penalties. If you insist on pursuing your case through the courts, so much time will pass that if you lose your case, it will be too late to amend your 2021 return to remove the income, and so you will end up paying double taxes on your withdrawal.

If you missed your RMD by a couple of days, you may be able to request a waiver of the penalty for cause. Otherwise, I would not recommend disregarding the date provided by the broker and substituting your own date when reporting income.

[TomD8]

If you receive a 20211099-R for your IRA distribution, the distribution will be taxable in 2021.  The IRS goes by the date printed on the 1099-R.

[fanfare]

In this situation the penalty would be waived, once you supply  an "Explanation" with Form 5329.

IRS rarely, if ever, imposes the 50% penalty.

[Opus 17]

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@TomD8 wrote:

If you receive a 20211099-R for your IRA distribution, the distribution will be taxable in 2021.  The IRS goes by the date printed on the 1099-R.

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I suspect the taxpayer requested a withdrawal in 2021 and is concerned it will be reported as occurring in 2022.  

[Quentin818]

Well, the funds not only were moved out of the IRA the minute I executed the online distribution, they immediately appeared as available funds in my brokerage account. I had been told by a representative two days prior that as soon as the funds leave the account that's the year for which the transaction is reckoned for tax purposes. Turns out the cut off was 4:00 p.m. ET whereas midnight was clearly implied. Nevertheless, I suspect their policy violates IRS rules because the money not only had left the account, but was in fact available and ready to use in the taxable account. I told them to check the IRS regs and get back to me but no word for 4 days. Not a big deal since I'm not yet old enough for RMDs and can put it back as my one allowed indirect rollover.

[fanfare]

@Quentin818 you have only 60 days to put it back.

Make sure the custodian understands your intent (i.e. use the correct form).

As I said before, processing rules can move your distribution into the next tax year.

[Quentin818]

I'm still thinking that there has to be IRS guidance on this even though it may be difficult to ferret out. And, there is GAAP to consider, albeit unenforceable.

The money moved in 2021, was available outside the IRA in 2021, and the action was irrevocable.

IRS rules allow me to make online charitable donations right up to midnight December 31 and there's no wiggle room.

It's one thing if the brokerage cannot process the distribution on the day requested but it's another where they hand the funds over and then decide to post-date the transaction. 

Will be interesting to see how they explain this away unless of course they recant and move it back to 2021. They did agree they would have to follow IRS rules but I guess they're still trying to figure that out.

[Critter-3]

As a matter of rule ... never wait until the last minute to do anything that has  a specific time deadline.  Throw in the holidays and you have a disaster waiting to happen.  All brokers have a processing time frame they work in so take this up with them as to how their system works. 

[fanfare]

If custodian treats it as 2022 distribution you won't see a 1099-R until long past the 60-day rollover deadline.