The Internal Revenue Service can ruin your day (or even your year) if you failed to take required minimum distributions from a retirement account, such as an IRA or 401(k). The income taxes due on the withdrawal amount plus the IRS penalty (a whopping 50 percent of the amount of the required minimum withdrawal) means the government gets a huge share of the money you earned and saved for retirement.
But, if you missed a required minimum distribution, there may be hope to avoid the penalty.
If last year was your first year for RMDs, you are OK if you take those distributions by April 1, 2014. In other cases, you should notify the IRS and state your case.
The IRS Web site says the penalty can be forgiven if “the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.”
According to Fox Business News, “The IRS has a lot of flexibility to waive the penalty on a missed or late RMD. For instance, you could qualify . . . if you were affected by a natural disaster and records were lost, or you were in the hospital. Perhaps you had a death in the family. Or, you might have received incorrect advice from a financial advisor or IRA custodian. Waivers have even been granted to individuals who were unable to take their RMD because they were in jail!”
Now these details:
- You must take RMDs beginning in the year you turn 70 ½ years old.
- Typically the custodian of your retirement account will inform you, and I have clients who have gotten reminders from the IRS. The IRA custodian can help you calculate the amount. Some financial statements list the amount
- You do not have to take RMDs from Roth IRAs.
- If you have failed to take RMDs, fess up to the IRS using Form 5329 and with a letter of explanation. Don’t wait for the IRS to find you.
- Consider using a tax professional to help you through the process.
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