It can be easy to forget about required minimum distributions (RMDs), especially as you move into retirement or if you inherit an IRA. Now, forgetting to take an RMD isn’t the absolute end of the world, but it should not be taken lightly. The penalty to missing an RMD is half the amount that was to be distributed, which is quite harsh and can be a substantial amount of money depending on the size of your retirement savings. So, what should you do if you forgot to take an RMD or you learned that you needed to take one from an inherited RMD? First off, withdraw the RMD out of the account as soon as you realize you need to take it. Next you will need to report the mistake to the IRS on the Form 5329, which can be filed along with your annual tax returns. On the form, make sure to report the RMD that should have been distributed, the amount distributed before the deadline, any reasonable cause amounts you would like waived, the penalty amount, and a letter explaining the reason for missing the RMD. Finally, and this is very important, do not pay the penalty until you hear back from the IRS with a denial or approval of your reason for the mistake. If your reason is denied, the IRS will then ask for payment of the penalty. As with anything involving the IRS, unless you are absolutely certain you know what you are doing, you should consider either hiring a financial advisor or tax professional to fill out and file your From 5329 so as to make sure it is done correctly. If you don’t want to have them actually file for you, you may want to at least consider talking to them during the process so as to make sure you’re doing things right. Remember, the key thing is that you correct your mistake as soon as you realize it and that you be honest with the IRS. Chances are your excuse won’t be accepted, but you will only have to pay the RMD penalty and nothing more. Missing and RMD is no laughing matter, but it’s not something you need to have a meltdown over, either. Just stay calm and do what you need to do!
Missing a required minimum distribution (RMD) is not laughing matter. The IRS will not let you off with a slap on the wrist or a small fine. In fact, they can actually be quite harsh and can include up to 50% of the missed amount. However, you can request relief from the IRS, which may or may not grant that request depending on the circumstances. If you find that you missed an RMD, the first thing you should do is to withdraw the RMD money from your account as the IRS won’t even consider your request for relief. Once you take out the amount of the RMD, you will need to file a Form 5329, which you can do along with your tax return for the year that the missed RMD money was finally withdrawn or as a standalone document. Make sure that you properly fill out the Form 5329, which includes reporting the amount that the missed RMD was and the amount that you withdrew. If you are seeking relief from the penalty, make sure that you also note that on the form along with the total amount of the penalty you want waived. You will also need to attach a statement explaining why you missed the RMD, what you did to remedy the situation, and the steps you will take to prevent such a mistake from happening again in the future. Oh, and DO NOT PAY THE PENALTY! These steps can be tricky and you may want to do some Internet research on how to properly file a Form 5329. Ideally, though, you will speak with a tax or retirement expert as soon as you realize that you missed an RMD so that you can ensure that you follow the proper steps to remedy the situation.
Have you been considering converting a traditional IRA to a Roth IRA? Well, if you want to do so and have the associated taxes count in 2018, you only have three (3) weeks left to do so. IRA conversions must be done by the end of the calendar year if you want them to count for 2018, which is particularly important if you want to take advantage of 2018 tax rates. If you do decide you want to make a conversion, make sure that it’s definitely something you want to do as recharacterizations are no longer allowed. The tax reform legislation, which was passed in 2017 and became effective this year, does away with recharacterizations. This means that if you convert to a Roth IRA and decide it’s not what you wanted, then you’re unfortunately stuck with the transaction. Given that conversions can be a bit tricky and there are various rules to follow, you should talk with a certified financial planner and get them involved if you plan on doing a conversion. Such professionals can also help you discuss whether a conversion is right for you and whether you may want to reconsider such a move.
The rules surrounding retirement savings accounts can be complicated. As such, it’s not uncommon for people to make mistakes when it comes to saving for retirement. Luckily, the rulemakers realize this also and allow for corrections of many retirement savings account errors and mistakes. It should be noted however, that many mistakes are not penalty free, regardless of whether you correct the error in a timely fashion or not. However, taking the steps to correct an error can keep those penalties to a minimum and potentially save you thousands of dollars in both taxes and penalty fees. Furthermore, the corrective measures themselves can be complex and confusing, especially if you are not good with taxes. Again, though, putting the time and resources into correcting the error is most likely much more cost efficient than taking the penalty. If you have made an error with your retirement savings (i.e. made an excess IRA contribution) you will want to take steps to correct the error as soon as possible and as efficiently as possible. Your best bet to do so is by speaking with a certified financial planner or–if you already know that the correction will involve a tax hit–a tax professional who can help you properly calculate what the tax will be. This is also another good reason why you want to track your retirement account transactions and check to make sure they were processed within a reasonable time because once an error occurs there is only so much time to correct it before it becomes a costly mistake. If you have questions about your retirement account or think you may have made an error and want to correct it, again, you should speak with a certified financial planner and retirement expert.
Planning and saving for retirement is a journey. During that journey you will most likely make a few mistakes that you will hopefully learn from and move on. Even if you plan everything out and seek professional advice, you can still make mistakes. Maybe you made an investment that didn’t quite pan-out like you hoped or you struggled to make a decision regarding a retirement plan and you didn’t like how that felt. Those mistakes happen and usually they can be easily corrected over time. What is most important is that you learn from those mistakes and use them to help make better decisions in the future. It’s also important that you have safeguards in place to avoid making major mistakes. Having a financial planner that you can lean on can help you to avoid many, if not most, mistakes, especially the crippling ones. However, that financial planner may not prevent you from making every little bad decision. After all, they can’t predict how things such as the markets will turn out either. Avoiding the major mistakes and minimizing the small ones is part of the journey to retirement. It’s okay to make a small mistake or two, so long as you learn from them and avoid making them in the future. If you are looking for a knowledgeable financial planner in the Dallas, Texas-area, please give me a call at 972-265-7990.
Did you make a mistake with your IRA in 2016? Perhaps you converted a traditional IRA to a Roth IRA and are now re-thinking the decision? Or maybe you contributed to a Roth IRA while mistakenly believing that your income was below the eligibility limits? If so, you may be able to fix those and certain other mistakes with a recharacterization. A recharacterization is a tax-free transfer of funds from one kind or IRA to another. If you are already considering a recharacterization, keep in mind that you must make the decision very soon as the deadline for recharacterizing a 2016 tax year contribution or conversion is October 16, 2017. Also, a recharacterization allows you to undo a contribution or conversion from a traditional IRA to a Roth IRA, but it does not resolve every IRA issue. Therefore, if you have made a possible mistake regarding your IRA, you will want to speak with a certified financial planner to see what options might be available to fix the mistake or issue.