The passing of a parent or loved one is traumatic. Often financial accounts and personal information have not been spelled out for those they leave behind. It was a year after a client’s father had passed that she understood the full impact of a required minimum distribution. The deceased’s three kids had done the task of sorting through belongings and personal affects. Their father’s financial portfolio included an IRA. There was already some confusion about this fund and whether to cash it in (with tax penalties) or transfer it into a beneficiary IRA. In 2015 each child received that year's RMD on the account and had a full year to cash or move the portfolio or leave it where it was.
Kathleen* found her way to our offices two years later. She was preparing her 2016 taxes and I asked if the Required Minimum Distribution had been taken on that beneficiary IRA. To her surprise no automatic withdrawal nor notice from the fund had been forthcoming. This was Kathleen’s first time handling an inherited fund and she was blindsided. After careful consideration she decided not to include the IRS RMD penalty with her taxes. It amounted to several hundred dollars (equal to 50% of the RMD value). For example, if your RMD was $2,000 and you didn’t take it, the IRS penalty would be $1000. Your standard RMD is created calculating the end of year account value and age of the owner. With our financial guidance Kathleen did the following:
- She included a copy of the check which showed the RMD taken retroactively.
- She filed her taxes including Form 5329. When you file this form, you do not have to prepay the penalty. But if the form is filed without payment of the 50% penalty and IRS determines that the penalty is owed, you could owe interest on the penalty payment.
- She included a letter of explanation from the financial advisor and herself. Form 5329 must be filed to start the statute of limitations clock.
Kathleen gambled that getting penalty money back from the IRS, was more difficult than paying it after the fact.
For those well into retirement, 70½ is the maximum age a person can defer their traditional retirement accounts before they have to start taking an annual distribution.
For married couples, if the spouse is 10 years younger than the person taking the RMD, it can be reduced.
Consult IRS publication 590-B to calculate your Required Minimum Distribution using Life-Expectancy Table II for Join-Life & Last Survivor (younger spouse) or Table III - Life Expectancy for yourself.
Kathleen’s story ended well. The IRS did not seek a penalty and she learned a valuable lesson. With our help, she is now creating achievable financial goals. Estate Management Group is a San Diego based wealth management firm headed by Deborah Sims, a thirty-year veteran of the financial services industry. As an independent wealth management firm, we provide clients with a wide array of investment options as well as unbiased wealth management guidance that is based on their unique retirement and wealth goals.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or instrument or to participate in any particular trading strategy. The information in this article is not intended as tax or legal advice, and it may not be relied on for for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.