Q: I am 80 and take my required distribution from my IRA account each December. In August of last year I switched my IRA account from one custodian to another.
Neither custodian sent me a reminder to take my minimum required distribution, and I forgot. When I mentioned this to my tax preparer, he said I would be subject to an additional tax of 50 percent on the amount I should have withdrawn. Is there anything I can do to avoid this?
A: First, take the distribution now. The IRS can, and in good conscience should, waive the additional 50 percent tax, if you can show your mistake was reasonable and that you have taken corrective action.
You have been a good taxpayer every year by taking your required distributions on time and only missed last year because of the change of custodian.
To request a waiver, your tax preparer should complete Part VIII of IRS Form 5329 as outlined on page 6 of the Form 5329 instructions. Attach a written explanation to the form, and file it along with your 2011 tax return.
Do not pay the additional 50 percent tax with the tax return. Wait for the IRS to respond. If they tell you that you still owe the additional tax, write them again and ask again for a waiver. If they still deny your request, ask for an appeal.
Q: Will my IRA custodian remind me to take my required distribution and tell me how much I must withdraw?
A: Most custodians will notify you, but there may be some that don't. Some will also make the calculation
for you. However, if you have multiple IRAs with different custodians, you must include the total value of all your IRA accounts in the calculation.
Q: How can I calculate the amount I must withdraw when I turn 70½?
A: The method you use to calculate your required minimum distribution for the first year is pretty straightforward, but you have to pay attention and get it right or risk the 50 percent additional tax. First, determine the combined value of all of your IRA accounts on Jan. 1 of the year you turn 70½ (your first "distribution year"). Next, look up your "distribution period" in the IRS Uniform Lifetime Table. This table is Table III in Appendix C of IRS Publication 590, available on the IRS website. Use your age on your birthday in the year you turned 70½.
For example, if you turn 70½ in the same year that you celebrate your 70th birthday you will look in the table under age 70 and find that your distribution period is 27.4. On the other hand, if you turn 70½ the year after your 70th birthday, your distribution period from the table will be 26.5. That's because you will look in the table under age 71 because you celebrate your 71st birthday in the year you turn 70½. The final step in the calculation is to divide the total value of your IRA accounts on Jan. 1 of your distribution year by your distribution period from the table.
Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth, Inc., in Monterey. Send questions concerning investing, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or email@example.com.