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Required Minimum Distribution Tips & Traps – Part I

Posted by Natalie Takacs on Feb 11, 2014 4:49:00 PM

Common Reasons Why RMDs are Missed

As discussed in our last blog, the deadline for receiving required minimum distributions (RMDs) generally is December 31st, and the IRS imposes a 50% penalty to the extent that distributions are not timely received.  Unfortunately, the fact that a RMD was not timely paid – or the fact that the amount of the RMD that was paid was not proper – often is not discovered until after the deadline. 

This article will address some of the more common reasons why RMDs are missed and our next blog post will address some of the more common errors made in calculating RMDs amounts.

Being unaware that the RMD rules apply.  While financial institutions that serve as custodians or trustees for IRAs generally are required to notify retirement account owners by January 31st of their obligation to take an RMD for the current year, IRA owners must take affirmative action to initiate the distribution.  IRA owners may miss a RMD because they either fail to read the notices sent by the financial institution or because they assume that the distribution will be automatically processed.   

New Accounts.  IRA custodians and trustees are not required to provide RMD notifications for accounts that were not held as of December 31 of the preceding year.  So, if an IRA owner has transferred funds from one IRA custodian to another during the year, the new custodian (who actually holds the funds) is not subject to the RMD notification requirements. 

Death.  If an IRA owner is subject to the RMD rules and dies prior to having taken his or her entire RMD for the year, the beneficiaries (including spousal beneficiaries) must take the balance of the decedent’s RMD before the end of the year.   In addition, in subsequent years, nonspousal beneficiaries generally are required to receive annual RMDs starting in the year following the year in which the IRA owner died.  Since IRA custodians and trustees also are not required to provide RMD notifications if the account owner is deceased, beneficiaries often are not aware of these requirements. 

Inability to Take Steps Necessasry to Satisfy RMD.  Sometimes, IRA owners are not able to take the steps necessary to receive a RMD due to natural and man-made disasters (i.e., flood, storm, fire, etc.) or illness. 

Erroneously Rolling Over an RMD.  Sometimes, IRA owners will take a distribution early in the year (perhaps to move a CD from one financial institution to another) and will redeposit the funds within the 60-day rollover period into a new IRA.  Generally, IRA owners are permitted to do one such 60-day rollover from an IRA every 12 months.  If an IRA owner is subject to the RMD rules, however, IRS rules specify that when an IRA owner takes money out of an IRA, the first distributions in a year must be applied to the RMD.   Thus, IRA withdrawals are not eligible for rollover until the RMD is satisfied.  Similarly, an RMD cannot be converted to a Roth IRA, so an RMD must be withdrawn before a conversion is done from additional distributions. 

Processing Issues.  There are many reasons why distributions are not timely processed.  For example, the IRA owner may fail to submit a distribution request by the custodian / trustee’s year-end processing deadline or the IRA owner may use the wrong distribution request form or may improperly complete the distribution request form.   Erroneous mailing addresses can cause problems too.  If an improper address is used by the IRA owner for the custodian / trustee, the distribution request form may not reach the processing department.  If an improper address is used by the custodian / trustee for IRA owner, the distribution check may be returned as undeliverable to the custodian / trustee. 

In most instances, if an issue occurs when processing a distribution, the custodian / trustee will contact the IRA owner. But if the distribution request was submitted late in the year, it may not be possible for an amended request to be processed by the December 31st RMD deadline. 

If you require assistance with your required minimum distributions, please contact Karen McCarthy at (216) 928-5414. 

Stay tuned for our next blog post – Required Minimum Distribution Tips & Traps – Part II:  Common Errors in Calculating RMD Amounts 

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Topics: Tax Planning & Strategies

Natalie Takacs

Natalie Takacs

Natalie, a Senior Manager in M&M's Personal Tax Advisory Group, has 20+ years of experience in the areas of individual, stock options, trust, and estate and gift tax.

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