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November, 2007 Tax Tip

Don’t Miss Your IRA Required Distribution; But If You Do, Don’t Panic


Tax law requires that an IRA owner must start taking distributions from his/her account beginning no later than April 1st  of the year after they turn 70½.  These required minimum distributions (RMDs) are determined by the balance in the account(s) on December 31 of the preceding year and the owner’s age.


I have some clients who have in the past overlooked taking their RMD.  The natural inclination is to panic, perhaps for good reason, as the penalty for missing an RMD is very harsh (50% of the required distribution).  Fortunately, the IRS has been given rather broad latitude to waive the penalty if the taxpayer can show reasonable cause for the failure.


As soon as I become aware of the problem I advise my client to immediately withdraw all missed distributions.  Doing so prior to IRS intervention is a demonstration of good faith.  The next step requires the completion of Form 5329 to calculate the penalty.  This form along with the statement explaining reasonable cause should be attached to the tax return for the year the distribution was missed.  If the return has already been filed, or if more than one distribution was missed, a Form 5329 must be prepared for each year and sent to the IRS along with the required explanation, which can encompass all years.  NOTE:  All distributions received in a given year will be reported on Form 1099-R for that year.  Copies of that form are sent to the account owner and the IRS.


Good examples of reasonable cause might be poor health and/or forgetfulness and family emergencies.   It would also be helpful to acknowledge that, as soon as the oversight was realized, immediate steps were taken to correct the situation.   Be sure to request a waiver of the penalty.


Another important point worth mentioning is that, while the initial distribution can be deferred until April 1st of the year AFTER one turns 70½, I normally recommend that my clients take that distribution in the year they actually turn 70½.  The reason for this is to avoid the double-up of income that would occur if they wait until the following year.  By waiting, they would be taking their prior year AND current year distributions in the same year, as the current year distribution must be taken by December 31st.


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