One of the major benefits of opening a traditional IRA is that you can defer the taxes on your contributions until you withdraw the money from the account. The IRS is going to eventually want to be paid the tax due it, however That means you cannot leave the money in your traditional IRA forever. Failing to take the required minimum distribution each year you are required to leads to a hefty tax bill.
The rules regarding required minimum distributions for traditional IRAs are simple. You have until April 1 of the year after you turn 70 1/2 years of age to take the first required distribution. That means if you turn 70 1/2 in 2020, you have until April of 2021 to take out your distribution for 2020. You then have until December 31, 2021 to withdraw the distribution for 2021. The IRS determines the minimum you must take out based on the amount in the IRA and your age. When you are 70 1/2, you need to divide the amount in the IRA by 27.4 to figure out your minimum, for example.
If you do not take out the entire distribution required or fail to withdraw from your IRA at all when required, you will owe a 50 percent tax on the amount you do not withdraw. To report the tax, you need to complete Form 5329. You can file form 5329 with your 1040. Calculate the tax you owe by multiplying the excess accumulation in your IRA by 0.5. For example, if you were required to withdraw $3,500 during the year but only withdrew $1,500, multiply the $2,000 you left in the account by 0.5. You will owe $1,000 to the IRS.
You may qualify for a waiver of the excise tax if you can prove that your failure to take the minimum distribution was due to what the IRS calls a "reasonable error" or if you can prove that you are working to fix the situation. You will still need to file form 5329. Attach a statement explaining the situation to the form. Write the minimum distribution amount on line 50 and the amount you actually withdrew on line 51. Next to line 52, write "RC" and the total you hope to have waived. Subtract line 51 from line 50, then subtract the amount you wrote next to line 52 from the difference. For example, if your minimum distribution was $3,500, you withdrew $1,500 and you expect to have $1,000 waived, write $1,000 on line 52. You will still need to pay any excise tax owed if the amount on line 52 is more than zero.
Unlike traditional IRAs, Roth IRAs do not have required minimum distributions. You can leave the money in a Roth for as long as you live. Although you can usually roll over the amount in a traditional IRA to a Roth, you cannot do that to avoid the need to take a distribution. The amount you are required to withdraw cannot be rolled over. You can roll over amounts in a traditional IRA that are not part of the distribution, though you will owe income tax on those amounts.
Based in Pennsylvania, Emily Weller has been writing professionally since 2007, when she began writing theater reviews Off-Off Broadway productions. Since then, she has written for TheNest, ModernMom and Rhode Island Home and Design magazine, among others. Weller attended CUNY/Brooklyn college and Temple University.