By: Clay Wyatt
When you've reached age 70 ½, the IRS requires you to begin taking a minimum IRA distribution each year, also known as a required minimum distribution (RMD). If you do not take your minimum IRA distribution by a set date each year (April 1st following the year you turn 70 ½ and December 31st each year thereafter), the IRS will assess a 50 percent penalty of what they think you should have taken out. However, you can avoid this fate.
As soon as you realize the oversight, take your minimum IRA distribution as soon as possible. This should be the amount you missed the previous year, not the current year's amount. Contact your custodian or financial professional to have this completed or see how to calculate your minimum IRA distribution.
The next step is to file form 5239 with the IRS. This form is used to report additional taxes on retirement plans such as IRA's. Send this in along with form 1040, which you would normally send in anyway. The additional tax must be entered on both forms. It is important to note that the 1040 must be used in this case, as filing form 5239 makes you ineligible to use forms 1040A or 1040-EZ. If you are not otherwise required to file a tax return, then simply send in form 5239. Of course, if you've already filed form 1040, it's not necessary to file it again. The tax payment for your missed minimum IRA distribution can be made via a check or money order made to the United States Treasury. Be sure to follow all instructions on each form that is filed.
Along with the tax form(s) and payment, send a letter requesting a waiver for the minimum IRA distribution that was missed. Explain your reason(s) for not taking your minimum IRA distribution, such as simply forgetting to do so, and request a waiver of the 50 percent penalty from the IRS. At this stage, it is not necessary to pay the penalty. You will be notified by the IRS if you still must pay a penalty for missing your minimum IRA distribution.
While missing your minimum IRA distribution may or may not cost you a lot of money, it is best to make sure you take it on time. Waiting on word from the IRS as to whether or not you've been granted a waiver may be unsettling, especially if large amounts of money are involved. If you are unsure about any of this, consult a financial professional. He or she will be able to help you decide how to remedy your missed minimum IRA distribution best.
In these days of on-line calendars and smart phones which allow you to set recurring reminders, there is not much excuse to forget your minimum IRA distribution. Don't be surprised if IRS gives you that same answer when denying your request for penalty waiver.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions