Thanks for taking a few minutes to read Telos Financial’s blog all about different financial planning topics. The purpose of the blog is to introduce financial advising concepts that I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
Hey everybody! This is guest post I wrote for Robert Powell and his space in TheStreet. It was a response to a question from one of his readers.
Question: I didn’t take my rmd for 2017, mixup between myself and my broker, who now is known as my advisor, by law. After reading your article in the paper, proceeded to take my 2017 rmd on 3/21/18. Question, my accountant is not sure if I can do that, without paying the penalty. That’s the question, thanks.
Thank you for the great question. This is a topic that seems to be not well understood, even though it affects the vast majority of folks who have savings. This is another example of why we need more fundamental finance classes in school.
First, you should know I am not an accountant or tax expert. The fact that yours won’t give you guidance on this is concerning and could be a good reason to change professionals.
Let’s start off by understanding the rule. If you have a qualified account, the year you turn age 70.5 and every year after you have to take a distribution from those (or one of those) accounts based on the total balance of all qualified accounts at the end of the prior year. Qualified accounts include Traditional IRA, Traditional 401k, 403b, 401a, PSP, RSP, to name a few, there are others. . .
For this response, let’s assume your birthday is 11/25/1946. Your 70th birthday was November 25, 2016 and you turned 70.5 May 25, 2017. That means you were required to take your first required minimum distribution in 2017. Each year, this is calculated based on life expectancy tables provided by the IRS, the year you turn 70.5, that number is 27.4 so you would add up all of these accounts and divide by 27.4 to get the amount you need to take in that year.
As you get older, the life expectancy goes down, so the amount of the distribution continues to increase each year by approximately one half of one percent. The amount will also fluctuate with the account value, so it’s important to pay attention to the calculation and appropriate life expectancy tables each year when you calculate.
The first year, you have until tax filing deadline to take this distribution. Every year after that, you have to take it during the calendar year. So, if your accounts on 12/31/2016 totaled $1,000,000.00 you would have to withdraw at least $36,496.35 gross from one of your qualified accounts by April 15, 2018. It’s still a 2017 distribution, but the first year the rule is more flexible. Remember, you have to take this in the year it’s for; a withdrawal in December 2016 could not be counted for 2017.
The IRS really wants you to withdraw this money so they get the taxes on the distributions. So, they’ve made the penalty for not taking RMDs properly massive. It’s 50% of the RMD missed, so if you didn’t take it for the year in the example, the penalty would be over $18,000! It’s absolutely staggering. The good news is the IRS is not a cold beast (at least in this case).
Further, if this is a Traditional or Roth IRA you inherited, it gets more complicated. There are options for how to take the funds, but the major difference is you need to begin making withdrawals in the year after the year the deceased passed away or you’ll have to withdraw all the funds within five years of their passing.
Let’s get to the meat of your question. You really only have one viable option. You will be best served to file form 5329 and write a letter to the IRS explaining what happened, explain you took the distribution a little late, and beg for forgiveness. The letter isn’t mandatory, but it’s the best way to help explain this was a one time error due to unusual circumstances, you’ve taken action to acknowledge the mistake, and have set process in place to make sure it won’t happen again.
Let’s further assume this was a one-time miss (let’s say you’re 77 and you’ve taken it properly every year, but just a little late in your 76th year, not that you missed it for the previous 5 years and just took your first).
Your best bet is to do what’s right, own up to the mistake, make your best plead for mercy, and hope they let you off easy. I think there’s high likelihood they will waive the penalty since you owned up to it.
Telos Financial is a Michigan’s financial advisor located in the Ann Arbor area for millennials, xennials, gen xers, & young professionals. It is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and families. Dennis LaVoy, CFP®, CLU® founded Telos Financial as the financial advisor for Ann Arbor and uses his experience, knowledge, and expertise to help families and individuals around Metro Detroit, Ann Arbor, and across the great United States of America achieve their financial objectives.