Now that 2012 has passed and you are starting to think about gathering the information to prepare your 2012 tax return, you may have noticed that you forgot to take your IRA required minimum distribution (RMD) for 2012.
If you have an IRA and turned age 70 1/2 in 2012, you had an RMD for 2012. But technically, you can wait until April 1, 2013 to take that first RMD. RMDs for years after your age 70 1/2 year are due by December 31 of that year. So, if you turned age 70 1/2 last year and didn’t take an RMD last year - no problem. Simply take it by April 1st of this year. However, you should know that you will have to take two distributions this year; the first by April 1st and the second by December 31st of this year.
However, if you were older than age 70 1/2 last year in 2012, then your IRA RMD for 2012 should have been taken by December 31, 2012. If not, you have a problem.
The IRS penalty for not taking your entire RMD on time is 50% of the shortage. So, if you were age 73 last year and your IRA RMD was $1,400 but you only took $400 by December 31, 2012, the shortage is $1,000. The 50% penalty would be $500 ($1,000 X 50%). Fortunately, there are two ways to fix the missed RMD and avoid the 50% IRS penalty.
First, you could simply take the $1,000 now in 2013. The bad news is because you are taking it late, the 50% penalty applies. The good news is that you can ask IRS to waive the penalty. You must file IRS Form 5329 with your tax return to report the shortfall. You can attach a letter of explanation that your mistake was due to a reasonable error and you fixed the problem by taking your missed 2012 RMD, albeit late in 2013. The IRS will likely waive the penalty.
A second way to fix the missed RMD is to send the $1,000 shortfall directly to a charity by January 31, 2013. Sending your RMD directly to a charity is called a qualified charitable distribution (QCD). A QCD is a tax-free distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) for an IRA owner or beneficiary, age 70 1/2 or older, that is paid directly to a qualified charity. You can have it count for 2012 if the distribution meets all the QCD rules. You will have to keep records for proof regarding any 2012 QCD made in January 2013. A QCD made in January 2013 that is treated as a 2012 QCD satisfies your untaken 2012 IRA, so you won’t have to file IRS Form 5329 and ask for a waiver of the penalty.
• Missed IRA RMDs are subject to a 50% penalty on the shortage.
• The IRS waives the 50% penalty for reasonable errors.
• A direct distribution to a charity in January 2013 can be used to fix your unpaid 2012 RMD.
-By Joe Cicchinelli and Jared Trexler