Correcting Retirement Plan Mistakes

Correcting Retirement

Plan Mistakes by the

Deadline

Do you have an IRA, 401(k) or other retirement plan? If so, you know how easy it can be to overlook things like taking your first RMD or contributing too much to your retirement plan. The good news is it’s early in the year and there is plenty of time to mark your calendar and plan for 2014. In addition, there is still time to correct a few 2013 errors before the applicable deadlines.

The Deadline is approaching

Taking Your First RMD

Do you have a traditional IRA and turned 70½ last year? If you didn’t take a required minimum distribution (RMD) in 2013, you have until April 1st to take your very first RMD. The

IRS allows you extra time for your first RMD only, the standard December 31st deadline applies to all of your subsequent RMDs. If you delayed your first RMD and plan to take it by April 1st, keep in mind that you still must take your regular RMD for 2014 by December 31st.

Contribution Mistakes

Did you inadvertently contribute too much money to your IRA or 401(k)? If so, you need to correct your contribution. The statutory deadline is the standard tax filing deadline, April 15th this year, but the IRS actually gives you until October 15^th to make this correction, provided you filed a timely return. However, if you make a correction after you have filed your tax return, you may need to amend your return. P.S., don’t forget to account for any net income or net loss attributable when making a contribution correction.

Year of Death RMDs

Retirement nest egg can add up

If you inherit an IRA from someone who passed away when he or she was 70½ or older, be sure to check with the IRA custodian regarding the status of the deceased person’s RMD. Why? If the IRA owner died before having a chance to take his or her RMD, the beneficiary (you) are responsible. Just like any other missed RMD, failure to take a year of death RMD by December 31st of the year the owner dies results in a 50% penalty on the undistributed amount! The Tax Court is at it again. Just when you thought you knew the ins and outs of the IRA rollover rules, a curve ball is thrown. Page 25 in the latest version of IRS Publication 590 interprets the one per year IRA rollover rule limit to each IRA you own. The Tax Court has successfully muddied the waters on this aspect of the 60-day rollover rule, at least for now. Say hello to a recently published case, Bobrow v. C.I.R. (T.C., Jan. 28, 2014, 7022-11). The background of this case is as follows: Petitioners were on the hook to the IRS for a significant income tax deficiency PLUS early distribution penalties AND accuracy related penalties. This was all related to “unreported distributions” from their IRAs, stemming from alleged violations of the once per year 60-day IRA rollover rule.

The Tax Court in this case stated that the one rollover per year rule applies to all IRAs, not each IRA. Its reasoning was: “Had Congress intended to allow individuals to take nontaxable distributions from multiple IRAs per year, we believe section 408(d)(3)(B) would have been worded differently.” It concluded this particular discussion with: “Regardless of how many IRAs he or she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period.”

This is a pretty shocking interpretation since the Code has been routinely interpreted to mean that the rule applies to each IRA. For now, conservative IRA owners are following this interpretation to ensure they are in compliance. Of course, there is an appeal process and this opinion could be overruled or perhaps the rule may be clarified in the near future. A rollover isn’t the only way to relocate your retirement funds. It is important to keep in mind that if you request a trustee-to-trustee transfer, sometimes called a “direct” rollover, it is not subject to the one per year rule. In fact, trustee-to-trustee transfers are unlimited… well, they are unlimited for now. The above case goes to show you that almost anything is possible, specifically a wildly different interpretation of a long standing rule.