You get years to save money in an IRA tax-free, but eventually you have to take the money out. If you own a traditional IRA, you start making the required minimum distributions every year after you turn 70 1/2. If you inherit an account, the RMD usually kicks in within a year of the owner's death. Beneficiaries must take RMDs whether they inherit a traditional or Roth account.
Penalties and Paperwork
Falling short of your RMD triggers a 50 percent tax penalty on what you didn't take out. If, for example, your minimum withdrawal this year should be $2,800 and you only take out $1,800, you pay a $500 penalty in addition to the regular income tax on withdrawals. In January, your bank should send you a 5498 form with your RMD for the year ahead. If you have multiple accounts at multiple institutions, each bank sends you a separate 5498.
The IRS gets copies of your 5498s and the 1099-R forms showing the amount you withdrew from your various accounts. That's all the information it needs to figure out if you missed your RMD for the year. If the IRS notifies you, or you discover your own error, use Form 5329 to report the 50 percent tax you owe, and file it with your 1040. If you don't have to submit a 1040 for the year, you can file the 5329 by itself.
In Part VIII of Form 5329, write down your RMD and the amount you actually took out. Calculate the tax you owe on what wasn't withdrawn and report the result on your 1040. If some or all of your shortfall was an honest mistake and you've withdrawn enough since then to correct it, note that adjustment on your 5329. Attach a typed explanation to the form. The IRS will review your case and decide if it will waive the penalty.
If you inherit an IRA, you have the option to empty the account in five years. In that case, you have no RMD: You can wait until the fifth year and then withdraw everything. Should you miss taking an RMD the first year, you can avoid penalties by going this route. If you inherit an IRA from your spouse and don't take an RMD, the IRS will assume that you're going to treat the account as your own -- an option only available to spouses -- and therefore don't need to take RMDs yet.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.