Since 2003, IRA custodians (banks, brokers, mutual fund companies, insurance companies, etc.) have been required to notify account owners if they had a required distribution to take, and the custodian could also make the calculation for the owner upon request. IRS kicked this up a notch in 2004 requiring the IRA institution to report to IRS that there is a required distribution.
They are required to notify IRS of all IRA owners who are subject to required distributions, but not the actual amount. The notice will only state that a required distribution is due. This is another reason to make sure clients are withdrawing thecorrect amount. Now that the IRA custodian is informing the client and IRS of required distributions each year, it is less likely that IRS will waive the penalty if the distribution is “forgotten.” IRS won’t forget. And it’s a 50% penalty on the missed distribution amount. The reporting applies to IRA owners only, not to beneficiaries, Roth IRAs, or qualified plans (Keoghs, 401(k)s, 403(b)s, governmental 457(b) plans).
In light of the above, it is more important than ever before to make sure that if clients are subject to RMDs, either as an IRA owner, plan participant or an IRA or plan beneficiary, that they are withdrawing at least the amount required. The client can always withdraw more, but if they withdraw less, it’s a 50% penalty on the amount they should have withdrawn, but did not. In the past, IRS has waived the 50% penalty for many IRA owners who requested relief based on almost any written excuse. But now, with increased reporting requirements, it will be harder to claim that a client was unaware of their RMD requirement.
Take some time before the year closes to make sure that if clients are subject to RMDs that they are taking them. Check also to see if they are subject to RMDs on company plans such as 401(k)s or 403(b)s. In addition, make sure that if a client is a beneficiary that they take beneficiary RMDs. The 50% penalty also applies to beneficiaries, including non-spouse Roth IRA beneficiaries. Although the Roth IRA RMDs for non-spouse Roth IRA beneficiaries will probably be tax-free, they still must be taken. Can you imagine how lousy it would be to get hit with a 50% penalty on a withdrawal that would havebeen tax-free?
Keep all rollover documentation to show both the distributions and any amounts rolled over to another IRA or plan. It is true that this is all reported on 1099 and 5498 forms, but it is still a good idea to keep the paperwork for at least three years. That’s the statute of limitations for most taxpayers. There is no statute if IRS can prove fraud. You’ve been warned. IRS is watching your IRA.
