Those who have an IRA or qualified plan benefits must take distributions under required minimum distribution (RMD) rules. When distributions are required but not taken, there is a hefty 50% penalty on the amount that should have been distributed but was not. Here are 5 common situations that you should take note of in order to comply with RMD rules, maximize tax-deferred account growth, and avoid the penalty.
1 – Missing the distribution deadline
Usually, you must commence RMDs no later than December 31 of the year in which you attain age 701/2. You can postpone your first RMD to as late as April 1 of the following year.
If you inherit an IRA and are not a surviving spouse who rolled over the inherited account, RMDs usually must start no later than December 31 of the year following the year of the owner’s death. However, no distributions are necessary if the entire account is distributed by the end of the fifth year following the year of the owner’s death.
2 – Using the wrong table to figure the RMD
The RMD is figured using IRS life expectancy tables. Be sure to use the correct one for you:
3 – Using the wrong account value to figure the RMD
The RMD is figured according the value of the IRA on the last day of the previous year. For example, the 2012 RMD is based on the account’s value on December 31, 2011.
You can combine the value of all IRAs to figure a total RMD figure. Then you can take the RMD from one or more of IRAs to satisfy the RMD rules. However, you cannot combine other requirement plan accounts. If you have a 401(k) account, you must figure a separate RMD for this account.
4 – Failing to take the 2009 suspension into account
For 2009, Congress suspended RMDs. In computing RMDs for 2012, don’t ignore this free pass. It means that if, for example, you inherited an IRA in 2008 and planned to distribute the entire account at the end of 5 years, that deadline is 2015 (not 2014). Normally, the 5-year period would have begun on December 31, 2009, but that year is waived; therefore, the 5-year period began on December 31, 2010. Thus, beneficiaries have an extra year in which to earn tax-deferred income from their inherited IRAs.
5 – Failing to ask for relief
If you have not taken an RMD, you can escape the 50% penalty by asking the IRS to waive it. This can be done where there is a reasonable cause for the failure, such as an illness or bad advice from the financial institution with which you hold your account.
Complete Form 5329 (lines 50 and 51), and on line 52 enter “RC” and the amount you want waived. Subtract this amount from the total shortfall. Attach a statement to the form indicating the reason why you think the penalty should be waived. You need only pay the penalty on any portion of the shortfall you do not ask the IRS to waive. The IRS will review your waiver request and inform you of whether it is granted. The IRS generally is liberal in granting such a request.
Don’t rely on information provided by financial institutions; it may not be complete or accurate. If you have any questions about RMDs, discuss your situation with a knowledgeable tax advisor.
The Tax Reform Act of 1976 requires the IRS to publish annual data on individual income tax returns reporting income of $200,000 or more. According to the most recent data, there were 4.4 million high-income returns in 2008.
Source: Spring Statistics of Income Bulletin (www.irs.gov/pub/irs-soi/11inhincomesprbul.pdf)View all factoids