Q: I transferred my IRA from one brokerage to another late last year and I just received a letter from my old brokerage along with my 1099-R showing my 2011 IRA distribution. The letter said my required distribution was around $10,000 and my actual distribution was $8,000. I always had tax withheld and had them transfer the after-tax amount from my IRA to my taxable account. I just assumed the same thing would happen at my new brokerage firm. I don't want to pay the penalty. Is there anything I can do to avoid this?
A: The penalties for missing a required minimum distribution (RMD) are stiff. You may owe 50 percent of what you should have taken, but didn't, to the IRS as an excise tax.
You can either pay the penalty of $1,000 (50 percent of the $2,000 shortfall) or ask the IRS to waive the penalty. Both actions require filing Form 5329 with your tax 2011 return. When filing form 5329, you must file Form 1040 or 1040NR, not Form 1040A or 1040EZ. A consultation with a tax professional is advisable, especially if you have already filed for 2011 and/or used 1040A or 1040 EZ.
If you decide to pay the penalty, the form is filed with a check enclosed for any tax due. If you decide to request a waiver, the form is filed with a letter of explanation attached and proof that the shortfall has since been taken from the account; a check should not be enclosed.
The IRS can waive the penalty if you can show that any shortfall was due to reasonable error and that you have taken steps to remedy the shortfall. In this instance, no news is good news. The IRS will contact you if they decide to deny your request for a waiver.
Retirement account owners approaching age 70-1/2 and beneficiaries at any age need to be aware of the RMD rules. The RMD amount must be withdrawn every year to avoid the 50 percent penalty.
The deadline for taking RMDs is usually Dec. 31 of the year to which the RMD applies. The two exceptions to this date for account owners are:
IRA owners obtaining age 70-1/2 have until April 1 of the following year to take their first RMD, but if they elect to do so, they will need to take two RMDs the following year.
If you are still employed beyond age 70-1/2, any assets in your employer retirement plan are not subject to RMDs until April 1 of the year following the year of retirement.
If one has the option to defer, it may not make sense to do so, since the RMD is always taxable in the year it is withdrawn. If the RMD is significant, taking out two RMDs the following year may place you in a higher tax bracket.
If you inherit an IRA or other type of retirement account, you will usually need to begin RMDs based on your life expectancy by Dec. 31 of the year following the death of the account owner. If the account document does not allow the life expectancy option for a beneficiary, the five-year rule will apply. Under the five-year rule, withdrawals are optional until the fifth year and then the entire balance must be withdrawn by Dec. 31.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question.
