Three Strikes and You’re Out (of money!)

Posted by Kathy Dean-Bradley, CPA

IRA Distribution Rules

Similar to ‘three strikes and you’re out’ in baseball, there is little opportunity in life to get multiple chances for a pardon. So when it happens in the Internal Revenue Code, you should take notice. Below are the three chances you get for complying with the rules for RMD from your IRA.

STRIKE 1: You didn’t take your Required Minimum Distribution (RMD) by December 31.  This is the minimum you are required to withdraw from all employer-sponsored plans, including profit-sharing plans, 401(k), 403(b), and 457(b) plans.  They also apply to traditional IRAs and IRA-based plans, such as SEP and SIMPLE plans.   Begin distributions no later than April 1 in the year following age 70 1/2.

STRIKE 2: You didn’t take a distribution in January 2013 and you didn’t elect for it to be treated as an RMD for 2012.  See our blog post How Does the American Taxpayer Relief Act Affect Nonprofits that was posted recently in our The Belfint Nonprofit Ledger.

STRIKE 3: You didn’t file FORM 5329 along with your individual income tax return (FORM 1040).  Among other penalties, this form is used to report the excise tax of 50% on the excess accumulation in qualified retirement plans (including IRAs).  If your RMD is $10,000 and you took none of it, then the tax is $5,000.

File FORM 5329 and attach a letter to request a waiver and you may get a pardon.  The IRS can waive part or all of the excise tax if there is reasonable cause for failure to comply and you took steps to remedy the situation.  If you don’t file the form, the statute of limitations doesn’t start.  Under most scenarios the statute of limitations for a tax return doesn’t exceed 3 or 6 years.  Not so for the RMD penalty.  If you fail to file FORM 5329, this gives the IRS free rein.

There are many reasonable causes of a missed RMD that are acceptable to the IRS. Consult your tax advisor to help you file the form and ask for a waiver of the penalties. In the future, set the RMD on autopilot with your custodian and have it paid out monthly, quarterly, or on a specific date. These steps will help you stay in the game and not strike out.