While there are a couple of exceptions, you’re required to take distributions from an IRA or a 401k under two circumstances. These are known as the Required Minimum Distributions, or “RMDs”, and they generally apply to:
a. Your own IRA, in the year you’ve reached age 70-1/2; and
b. An IRA you inherited, from someone other than your spouse, in the year following that person’s death.
Failure to take the RMD results in one of the most severe penalties you can imagine: the penalty is 50% of the missed distribution amount. So if your IRA is worth $100,000, and the RMD calculation is, say, $4500, the penalty for not taking that distribution is $2250. Ouch!
Luckily that penalty can be waived if you have a good excuse and you correct your oversight. The details are in the IRS guide to IRAs, Publication 590. But Boston area attorney Natalie Choate, a specialist in retirement distribution planning, summarized the process for me when I attended a seminar sponsored by the Boston Tax Institute a couple of weeks ago.
It appears that the IRS will generally waive the penalty when there is both a “reasonable cause” and “remedial action”. Reasonable cause can be an error by the IRA custodian, or bad advice from an advisor, or your illness, military service, or, surprisingly, your incarceration! The remedial action is usually your making up for the distributions that you had previously missed.
You also have to file IRS Form 5329 as follows:
·On line 50, enter the amount of the RMD that you missed
·On line 51, enter the amount of the RMD that you took, usually $0
·On line 52, enter the difference as $0, and mark “RC” in the margin to indicate “reasonable cause”
·Attach a statement on the “reasonable cause”, and provide evidence of the remedy or corrective action.
Form 5329 can be filed as a stand-alone form for the tax year in question, and no amendment of your prior return is needed.
If you find yourself in this situation, you should contact a tax accountant to guide you through the process.
If you have specific questions about your RMDs, please email me at ron@ol-advisors.com