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How To Avoid Required Minimum Distribution (RMD) Penalties

This is a GOOD NEWS, BAD NEWS topic.

First the Bad News!

Individuals who attained age 70½ by December 31st are required to take their first RMD no later than April 1st of the following year.

Therefore, if you did NOT take your first Required Minimum Distribution (RMD) by April 1st, you are in an IRS penalty situation.

The IRS penalty is 50% of the amount of the RMD that was not taken timely. For instance, if your RMD was $5,000, and you did not take a distribution, the penalty would be 50% of $5,000, or $2,500! AND the tax will be owed when the RMD is finally received.

Another example: If your RMD was $5,000 and you took only $3,000, the penalty would be 50% of $2,000 (the amount NOT taken), or $1,000.

Now the Good News!

If you believe you have a valid reason for not having taken your RMD in a timely manner, (and this applies to any RMD, whether your first one or not) you should immediately discuss this with your IRA Custodian/Trustee. They may be able to help you prepare a request to the IRS concerning this.

For sure, you should also discuss this with your personal tax counsel on numerous occasions. The IRS has fully or partially abated this penalty for valid reasons, sometimes even if the RMD was just overlooked.

In addition, JM Consultants, a financial advisory firm, recommends the following.

First, to have any chance of the IRS fully or partially abating your penalty, the RMD should be taken immediately.

Then, when you explain the circumstances of your missed RMD, you will be able to tell the IRS that as soon as you discovered the omission, you corrected it.

Also, it would be a good idea to include information in your abatement request that the omission was an accident and that you and your IRA Custodian/Trustee have taken steps to make sure it does not happen again.

It would be a good idea for your IRA Custodian/ Trustee, your personal Tax Counsel and for you to set up proper reminders for future RMDs.

Two Taxable IRA Distributions in a Single Year?

Remember, if you exercised your right to take your first RMD this year for the year previous, you must also take a second RMD by December 31.

Just be aware, you will have two taxable distributions in a single year.

How To Take A Distribution of a Self Directed IRA Asset

When you’re taking a distribution from your IRA, it doesn’t necessarily have to be a distribution of cash. You can also take in-kind distributions from your IRA.

The way you do this is to determine the value of the asset that you wish to distribute. If the asset is real estate, you will need an appraisal. If the asset is something other than real estate, a third party valuation will be fine.

You will send your custodian a distribution form along with your valuation for the asset. Your custodian will then create an assignment of the asset from the IRA to you.

The value of the distribution will be recorded on a 1099 and sent to you. You will be liable for the taxes on the value of the distribution. Keep in mind that if you are under the age of 59 ½ there will also be a 10% early distribution penalty.

If you have questions, make sure to speak with a CPA or tax professional.

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.