Required Minimum Distributions from IRAs
Recently, several of our senior clients have mentioned they neglected to take the required minimum distribution (RMD) from their IRA. It is important to know that the IRS penalty for this mistake is severe. The penalty is 50% of the RMD plus any income tax you owe on the RMD. For example, if your RMD is $5,000, then the penalty is $2,500, plus income taxes on the RMD.
If you realize that you did not take your RMD by December 31 last year, there are a few steps you can take to try to avoid the penalty. First, consult a professional: an accountant, attorney, or tax adviser. Second, you should withdraw the RMD immediately.Third, you should notify the IRS of your mistake by filling out Form 5329. The IRS has some latitude in granting requests for waiver of the penalty. The instructions to Form 5329 outline the process for requesting a waiver. The professional whom you consult can guide you through this process.
Generally, you must begin taking RMD’s from your IRA, SEP IRA, Simple IRA or your retirement plan account in the year in which you turn 70 1⁄2. You may, however, delay that first distribution until April 1 of the following year. For each subsequent year, including the year in which you took your first RMD by April 1, you must take the RMD by December 31 of the year. If you have multiple retirement accounts or multiple types of retirement accounts, you should determine what the RMD is for each account, and make sure you take the sum total of your RMD’s by December 31 of each year. Don’t be caught off guard. The consequences are just too severe.