Q: I was the beneficiary of my mother's IRA. I didn't know I was supposed to continue taking distributions, and I'll be penalized for not taking them. Is there a way I can ask the IRS to waive this penalty? I honestly didn't know, and Fidelity -- which was the IRA custodian -- didn't inform me. -- AM, via email
A: You can indeed ask the IRS to waive the penalty, and you should do that -- and take those distributions out of the IRA -- without delay. Chances are that they'll settle for a sincere apology.
Here's the rule you didn't know: As your mother's IRA beneficiary, you had to start taking minimum annual withdrawals based on your life expectancy by December 31 of the year following her death. (You calculate the minimum amount you must withdraw every year using an IRS actuarial table called 'Single Life Expectancy Table for Inherited IRAs'. You'll find it in IRS publication 590, which you can download at www.irs.gov).
The penalty for failing to take annual required distributions is really steep. It's 50% of the amount you were supposed to take, but didn't. So if the required distribution was $1,000 and you took nothing, the penalty would be $500. (In tax jargon, it's called a 50% excise tax on your 'excess accumulation' in the IRA.)
Bear in mind, however, that you have no problem if 2009 was the only year you missed taking a distribution. Nobody was required to take a minimum IRA distribution in 2009. (There was a special one-year exemption so that people wouldn't be forced to take taxable distributions from retirement accounts that had been decimated by the 2008/2009 financial meltdown. )
If you failed to take the required minimum distributions in other years, take them now -- and immediately use IRS Form 5329 to report the excise tax you owe. Don't worry: the instructions for filling out Form 5329 also tell you how to ask that the penalty be waived because you made an honest mistake.
Or as IRS Publication 590 puts it:
" If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329."
You can download that form and the instructions for completing it at www.irs.gov.
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c:) Lynn Brenner, All Rights Reserved
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