2009 hiatus on mandatory IRA withdrawals contributes to 2010 penalties

It's a common misconception that after a certain age you can choose to withdraw from your traditional IRA or leave it to grow. In fact, there is a Required Minimum Distribution (RMD) that a retirement plan owner must withdraw from any traditional IRA (or employer-sponsored retirement plan) when he or she reaches the mandatory withdrawal age of 70 1/2. The only way to avoid being forced to withdraw money is by continuing to work past this age; but, if the account holder is even a five percent owner of the business sponsoring the retirement plan, waiting for retirement to start taking withdrawals is not an option. Unfortunately, a 2009 hiatus on the RMD wound up causing quite a bit of confusion and some stiff penalties for those who are affected by it.
 
"Some of my clients who had arranged for the RMD to be automatically deposited into their checking accounts every December deactivated that service in 2009, when the withdrawal was not required," said Linda Seeger, EA, an enrolled agent with Seeger Tax Services, Inc. in Charlevoix, MI. "When 2010 rolled around, they didn't think to restart the withdrawals. I am writing letters to IRS concerning their situations and requesting relief from the penalty."
 
Enrolled agents report that this flip-flopping of the requirement has been particularly hard on clients who are elderly and do not have family members close by who help them maintain their finances. Some of these clients have no taxable income for the year and would not have had to file, yet now must pay an expensive penalty for something that was entirely unintentional and had no tax consequence.
 
But how muchmust the account holder withdraw when the time comes? The National Association of Enrolled Agents (NAEA) wants to remind taxpayers that calculating the correct amount of the RMD can be complicated. It involves dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that IRS publishes in three separate tables. An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Many taxpayers choose to consult with a tax professional to help with calculating the proper IRA withdrawal amount.
 
About the National Association of Enrolled Agents (NAEA)
NAEA is the professional society that supports its members with resources, education and networking and by representing their interests to government, business and the general public. Find out more about NAEA and becoming an enrolled agent at www.naea.org.
 

You may like these other stories...

Mike "the Situation" Sorrentino, one of the stars on the former TV show "Jersey Shore," is in the middle of…well, a tax situation.On October 23, the erstwhile reality show attraction was arraigned...
Deal to lock in US tax cuts is bubbling up on the HillSome US lawmakers are exploring a post-election deal that would lock in permanent tax cuts for major corporations and low-income families, Richard Rubin of Bloomberg...
For many individuals, a key part of their investment and estate planning is to write yearend checks for gifts to family members. The following reminders will help put your tax planning in perspective for 2014 and beyond, and...

Already a member? log in here.

Upcoming CPE Webinars

Oct 30Many Excel users have a love-hate relationship with workbook links.
Nov 5Join CPA thought leader and peer reviewer Rob Cameron and learn ways to improve the outcome of your peer reviews while maximizing the value of your engagement workflow.
Nov 18In this session Excel expert David Ringstrom, CPA tackles what to do when bad things happen to good spreadsheets.
Nov 19How do you minimize redundant work and unnecessary steps to maximize the amount of work moving through your firm?