Tax Tips Blog

Vince writes:
I was checking my IRA yesterday and couldn’t find where my broker had taken out the RMD for 2007. I called them today, and they said I did not signed up for automatic distribution. I find this hard to believe, but they are very unfeeling about the matter. The question is, is there anything I can do to avoid the 50% penalty? I think it will be something like $6,000!

Another question is, if I have to pay the penalty, is there any point in taking out now the sum that should have been taken out in 2007?

In any event, I think I will transfer my account to another broker.

Thank you,
Vince

My reply:
Hello Vince, thanks for visiting.

You can petition the IRS to refund the penalty. There’s no guarantee it will work, but it is worth the effort.

Also, do you have more than one IRA? If so, the RMD doesn’t have to be taken from each IRA. You just have to be sure that the distributions are larger than the total RMDs.

Best wishes,
Gina

Richard asks:My father passed away earlier this year. He was 86 when he died. I am the sole beneficiary of his Traditional IRA. He was taking distribution for some time. I think I understand correctly that I may set up a beneficiary distribution IRA from which I must continue to make withdrawals (starting by Dec 31 of next year) based on my lifetime, and this is what I intend to do. My question pertains to the RMD for this year. IRS Publication 590 indicates that a distribution must be taken, but is silent about who actually receives the distribution, his estate or his IRA beneficiary. Hence, the difficulty. Thanks for your help. Regards, Richard

My response:Hello Richard, thanks for writing. My condolences on your father’s passing.

It’s impressive that you tried to research this issue by reading IRS Publication 590. As you have now come to realize, IRS Publications can be very helpful, but they do not contain everything that is written in the code (or they’d be just as long and complicated!) or that you may need to know.

The actual authority which states who is to receive the distribution is located in regulation 26 CFR § 1.401(a)(9)-5, A-4(a).

You are correct in how you will be setting up your inherited IRA. Since your father died after he turned 70 1/2, which is when he started taking his required minimum distributions (RMD) from his IRA and assuming he did not take his RMD already this year, then you, as his sole beneficiary is required to take what would have been his distribution this year (the year of his death).

This is one of the times that the IRS rules actually make sense. If the distribution were to be made to his estate it would no longer be in the IRA and would be subject to the provisions of your father’s will. If your father’s will said his estate would be split between 5 people, then all 5 people would get part of this IRA distribution, when you were named as the IRA’s sole beneficiary. So it’s actually fair and logical that you, as the sole beneficiary, would receive your father’s RMD in the year of his death.

Best wishes, Gina

Joseph from Springfield, MO asks:

I understand that for 2006 & 2007, a person can take their RMD from their IRA, have it sent directly to a charity (church) and not have to report that amount as income on Fm 1040.  The receiving charity would have to provide verification the gift was indeed received.  Do you have any information on how the gift is handled, i.e., can it in fact be done?  Is there a special code used on the 1099 to advise Internal Revenue that this transaction is different from the ordinary RMD distribution or is some other form completed to attach to the 1040?  Your comments will be appreciated.
Joseph

My response:
Hello Joseph!  Thank you for visiting my blog.

President Bush did sign legislation that allows IRA owners who are 70-1/2 or older, who are required to make minimum distributions, donate those distributions directly to charity.  There are certain rules that must be followed, one of which is that the trustee must send the withdrawal directly to the charity.  These distributions will count against your required minimum distributions for the year and it is excluded from your income.  When you receive your 1099 from your trustee (the person who made the withdrawal and sent it directly to a qualified charity), they will indicate the “Gross Distribution” in Box 1 and the “Taxable Amount” in Box 2a.  They will indicate, with the appropriate distribution code, in box 7 that the withdrawal was made via a trustee transfer directly to a qualified charity.  Since there are other requirements that must be met it is best to have your tax accountant discuss this with your trustee to make sure the transaction is carried out appropriately.

I hope this answers you question.

Best wishes,
Gina

Follow-Up:
Ms Gwozdz,
Thank you for the prompt and informative reply to my question.  I have
asked for information from the IRS 800 number somewhere.  The local
office folks hadn’t even heard about the matter.  Local tax preparers had
no information, only suppositions.  One CPS I talked with at least knew
about the rule but would not have any definitive information until he
attended a meeting in December to get updated on tax changes. 

Its very hard to tax plan if you don’t know the rules.  Now its possible
to take some action.

Thanks again for the information.

Joseph