It seems that we go from one deadline to another. For most people the next deadline is Tax Day and this year because of a weekend and a holiday, Tax Day is on April 18. However, for many people there is another deadline that is much sooner than April 18 and penalties for missing it are much more severe. What I am referring to is the April 1st deadline for those taking their first required minimum distribution.
As many people know, when you turn 70½ you must begin withdrawing from your IRA and retirement accounts. For those who are 70½ and who do not take a yearly required minimum distribution from their retirement accounts, the penalties can be severe. For those who missed their required minimum distribution the penalty can be as high as 50 percent of the tax due. One exception to the law deals with your first required minimum distribution. Under the law, you can delay your first required minimum distribution to April 1st of the following year. Therefore, if you turned 70½ in 2016, as long as you make your first required minimum distribution by April 1st of 2017 you’re in compliance. I bring this up because April 1st is right around the corner, and for those of you who did turn 70½, it is important that you make a required minimum distribution by the deadline. Since this year, April 1st falls on a weekend, there is a little reprieve; you have until April 3rd. Because the deadline has arrived there is no time to delay. Remember, in many situations the custodian on your retirement account may need a couple days to make the distribution. Therefore, if you did turn 70½ in 2016 and you have not made your required minimum distribution, don’t delay, you must do it today.
Whenever you do a required minimum distribution, it is not the current balance of your account that governs; rather, it is the balance as of 12/31 of the preceding year which governs. Therefore, for those of you making your first required minimum distribution by April 1st, your 12/31/15 balance on your retirement account is the relevant number.
People forget to make their required minimum distribution all the time. If for some reason, you were required to take a distribution in 2016 and you forgot, you need to be proactive and take the distribution as soon as you can. In addition, if that is the situation, when you file your 2017 tax return you want to attach Form 5329 to your return. I think you should also attach a letter explaining why you missed taking your required distribution. As surprising as this may sound, the IRS has been lenient with people and in many situations when people had a reasonable explanation, the IRS waived the penalty. In fact, whenever you get notified by the IRS regarding a penalty or additional taxes due, even if they are correct doesn’t mean you should not try to have the penalties waived. You would be surprised how often the IRS does waive penalties.
Required minimum distributions are a fact of life and there are virtually no exceptions to the rule. Most people wait until the end of the year to take their distribution, but you don’t have to. As long as you take the distribution within the appropriate calendar year you are fine. The key is to base it on the previous year’s balance and not to wait until the last second.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.