Should I pay for Vanguard mistake?

[ttlc22019]

It started in early 2023, when Vanguard posted on my account that I must take $17,000 by 12/31/2023 to satisfy the Requirement Minimum Distribution (RMD) requirement for my Traditional IRA account.  In June 2023 I sent a designated Vanguard check to withdraw $11,000 as partial RMD distribution.  As Vanguard had set up auto distribution annually in mid December, I called Vanguard on 12/05/2023 to remind them that the auto distribution should be $6,000 and they agreed.  However, on 12/18/2023 Vanguard made a mistake and auto distributed $17,000 so the total 2023 RMD distribution became $28,000.

I called Vanguard on 12/26/2023 to point to the Vanguard mistake, and Vanguard rolled back $11,000 the following day, which they called “Indirect Rollover”.  However, Vanguard insisted that their 1099-R would show $28,000 in box 1 and 2a, and only Form 5498 available in May 2024 would have the $11,000 rollback.  They stated (quote) “Even though an indirect rollover may not be taxable, the transaction is still tax reportable.”  They also told me to review the IRS Publication 590-A.

I entered $28,000 on my 1099-R, using 2023 Turbotax Premier for the 2023 tax return.   But just to see the difference in tax, I ran a test by changing box 1 and 2a on the 1099-R from $28,000 to $17,000 and Turbotax showed in a heartbeat that the difference would be over $2,500 in federal tax that I had to pay.  It did not include CA state tax.

I am confused now.  First of all, what is the IRS rationale that “the transaction is still tax reportable”, assuming what Vanguard stated was by the IRS rules?  If Vanguard or some other brokerage firms put 28 million in box 1 and 2a on 1099-R, then the taxpayer will have to pay tax for the 28 million?  Secondly, in my case, how can the Form 5498 help me to get back that $2,500 tax?  I am holding on to my tax return until June as the IRS extended the tax filing deadline to 06/17/2024 for all taxpayers in San Diego County, CA.

And how can I hold Vanguard responsible for their mistake?  My Traditional IRA account history shows my $11,000 distribution check in June 2023; Vanguard distributed $17,000 toward RMD on 12/18/2023, and they rolled back $11,000 on 12/26/2023.  I also have the Vanguard message regarding my case, where they just stated “Even though an indirect rollover may not be taxable, the transaction is still tax reportable” and mentioned IRS Pub 590-A,  then walked away with their mistake scot-free.   Will filing a complaint to Vanguard CEO, or to SEC, help to get back my $2,500 overpaid tax?

Thanks.

[Mike9241 · Accepted solution]

If you return an excess Required Minimum Distribution (RMD) within 60 days, it is generally not taxable. 

1. 60-Day Rollover: If you realize the excess RMD within 60 days of receiving it, you have the option to return the excess amount to your retirement account. This process is called a 60-day rollover.

2. Tax Implications:
   Fully Redeposited: If you completely redeposit the distribution amount (including any withheld taxes) back into your retirement account within the 60-day window, it is considered a rollover and is not taxable.

3. Reporting:

   • When you enter the Form 1099-R (which reports the distribution) into tax software like TurboTax, indicate the amount of the distribution that was the RMD.
   • Specify that you moved the money to another retirement account or back to the same account.
   • If the rollover doesn’t violate the one-rollover-per-12-months limitation, report the amount rolled over.

in short by law they must report the 28K as a distribution in box 1 since you actually got that amount. the box taxable amount not determined should be checked. The 5498 will show $11K in box 2 indicating a rollover.  If you got $28M then Vanguard would be required to report $28M but if you only got $8M Vanguard would need to issue a corrected 1099-R. completing the 1099-R entries correctly in Turbotax will result in only $17K being taxed.

for RMD amount in Turbotax enter the $17K. eventually, you'll get to a screen that asks what you did with this money. so check the circle that says you returned it. Next check the circle that asks about doing a combination. Finally you should see a box about the amount rolled over where you will enter the $11K. 

on the 1040 box 4a should be $28K the word "rollover" should appear and 4b should be $17K

Will filing a complaint to Vanguard CEO, or to SEC, help to get back my $2,500 overpaid tax? proper entry in Turbotax will not result in paying the extra $2500 so there's nothing to get back. As to filing a complaint that's up to you. 

[ttlc22019]

Hi Mike9241,

I am grateful that you spent time to educate and help me with my issue!  I not only learned from you about 60-day rollover, one-rollover-per-12-months limitation, and other RMD rules, I also got guidelines on how to use TurboTax to report the factual 2023 RMD distribution and tax. 

The reason I am upset with Vanguard, is that their retirement department only told me they would put $28,000 on the 1099-R, and nothing else.  Their mentioning box 2 of 2023 form 5498 would have shown me the place for the rollover information, thus given me peace of mind.  The form is standard and has nothing to do with giving me advice on taxes.

I have a follow-up question with form 5498. For the 2023 tax return for San Diego County taxpayers, the IRS extends the filing deadline to 06/17/2024.  Had it not been the case, would I have to file an IRS tax extension as Vanguard form 5498 always comes in May, past the normal April 15 deadline?  I am asking in case Vanguard makes a similar RMD over-distribution in future.

Thank you again for your reply, which I am keeping for learning.

Best,

ttlc22019

[LeticiaF1]

You are correct, if the IRS had not extended the due date this year, you would've to file an extension.  

@ttlc22019