IRA Minimum Distribution Failure by Zacks Investment Research
No matter how you save for retirement, you can't avoid taxes. Traditional individual retirement accounts let you defer taxes when you put money into them. That is a major benefit of traditional IRAs, but you can't escape taxes forever. At some point you have to take that money out. The Internal Revenue Service requires minimum withdrawals, called distributions, starting at age 70 1/2, subject then to tax as ordinary income.
You must take the first distribution from a traditional IRA by April 1 of the year after you turn 70 1/2. How much you must take out varies with the amount in the account and your life expectancy, calculated according to one of three IRS tables. The most common table is a uniform life expectancy, based on the age of an account holder with a spouse less than 10 years younger. Other tables are based on a spouse more than 10 years younger or on a beneficiary of an IRA.
You can withdraw as much as you want after 70 1/2, but failing to take the required minimum will bring a stiff penalty. It's 50 percent of the difference between the amount that should have been distributed and the amount that actually was. For example, if your required minimum is $2,000 and you only take $1,000, you'll pay a $500 penalty. Minimum withdrawals must be taken by Dec. 31 of each year. A late withdrawal counts as a failure and is subject to the same penalty as an inadequate distribution.
If you have more than one traditional IRA, you have to calculate a minimum withdrawal for each one, but you can take money out of only one. That distribution has to equal the total of minimum withdrawals for all your IRAs. If you take more than the minimum one year, you cannot apply that against the minimum for another year, and you can't count distributions from 401(k) or 457(b) retirement plans.
You can request a waiver of the penalty if you can show a reasonable explanation for the failure through a letter and a Form 5329 filed with the IRS -- but you have to withdraw the missed amount first. Reasonable explanations are such things as an elderly taxpayer being ill, a custodian miscalculating the amount, or a mathematical error. The request has to state the amount of penalty to be waived and the amount of additional tax to be paid.
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