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IRA distributions when reaching age 70 1/2 in 2014

IRA
IRA by GotCredit, on Flickr, under Creative Commons license, on Flickr

When do you turn 70 1/2?

First things first, what genius in Congress decided to use age 70 1/2 instead of 70 or 71? When are you 70 1/2? The IRS says you turn 70 1/2 on “the date six calendar months after the 70th anniversary of the employee’s birth.” (Regulation 1.401(a)(9)-2, A-3) An example in the regulation says that if your birth date is June 30th, then you turn 70 1/2 on December 30th (shouldn’t that be December 31st, well it is not). On the other hand, if your birth date is July 1st, then you turn 70 1/2 on January 1 of the next year.

Why should you care?

If you turned 70 1/2 years old during 2014, you are required to take a minimum distribution by April 1, 2015 or face a 50% penalty. That is 50% of the amount you should have withdrawn but failed to. That is a pretty steep penalty. IRS is fairly liberal on waiving the penalty the first time but after that they are quite strict. Even though IRS is liberal in forgiving the penalty, there is no guarantee and an excuse like “I did not want to take my required distribution” will not work. NC does not have an equivalent penalty.

Distribution deadline

For the year you turn age 70 1/2 you can take your minimum required distribution (MRD, aka RMD for required minimum distribution) any time after turning 70 1/2 through April 1st of the following year. Please note that an IRA distribution the year you turn 70 1/2 does not count as an MRD if it is before you reach 70 1/2. Why April 1st? Perhaps Congress thought it would be funny to penalize people for missing something on April Fool’s Day. I will leave it to you to decide the why.

What is important is the date. A lot of people get confused and equate the deadline with the individual filing deadline of April 15th. Sorry, take your post 70 1/2 MRD after April 1st of the following year and on or before April 15th and you owe the 50% penalty. Determining your MRD is beyond the scope of this post as it depends on several factors. Your IRA custodian may be able to help but remember, they will probably disavow any responsibility if they get it wrong.

Note: The MRD rules do not apply to Roth IRAs during the original owner’s life. The MRD rules do apply to people inheriting Roth IRAs.

Conclusion

If you turned 70 1/2 in 2014 take your MRD now! It takes time for your IRA custodian to process the paper work so do not wait until the last-minute. Also, please do not count on IRS being forgiving.

 

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Canadian RRSPs and RRIFs relief

Canadian RRSPs and RRIFs election change

Finally IRS has come to their senses. Prior to October 7, 2014 Canadians subject to U.S. income taxes had to make a written election to avoid paying tax on what they earned in RRSPs and RRIFs. If a Canadian failed to make the election on their first return, they had to report and pay tax on the earnings in their RRSP or RRIF every year. Fortunately, the pain could be stopped by making a later election but the taxpayer could not get the tax back for years prior to the election.

RRSP and RRIF acronyms

RRSP = registered retirement savings plan
RRIF = registered retirement income funds

These Canadian plans are similar to the U.S. individual retirement plans (IRAs). plan.

The Change

This is probably one of the most frequently missed elections. I have a hard time figuring out who would not want to make this election if they knew about it. Now the IRS will assume affected taxpayers made the election unless they the taxpayer affirmatively elects out by reporting the income and paying the tax each year. Not only does it help Canadians who are new U.S. taxpayers, it also retroactively helps those who did not make the election and did not report the income all the way back to 1996.

You can read the press release (IR-2014-97) at the IRS website. At the bottom of the release, IRS provides a link to a PDF with the official announcement.

Please note that this notice does not eliminate the need for other forms such as the FinCen Form 114 that reports foreign financial accounts. The RRSPs and RRIFs may also have to be reported on Form 8938. Penalties for failing to file either form are quite severe, especially the penalty for FinCen 114.

IRS – protecting Canadian retirement savings since 2014!