What happens when you don't take the required minimum distribution?
May 28, 2014 8:42 AM   Subscribe

My family, being not financially savvy, bought into a slew of variable annuities in 2000 without knowing what they were doing. My grandfather is now in his 80s and never withdrew his required distribution from his IRA variable annuity. I know the penalty is steep. What can we do?

The IRS says you have to start taking out your required minimum distribution by year 70 and 1/2. Well, it's 14 years later and he hasn't done any of that.

I know there's a crazy steep penalty (50%! holy crap) and I'm not sure what to do now. I just printed out the forms to start doing a systemic distribution withdrawal. But what about all that other money? What happens? Is there any chance of getting the penalty partially waived? My mother blames the market crash for her inaction, but I think it's mostly ignorance and poor English skills (immigrant family).

I am looking for people who have been in a similar situation.

I know I should talk to a tax advisor. Does anyone have any idea how to find a good one? I would literally need someone to paint a road map since I am in way over my head trying to untangle the financial situation of my family. Money is tight.

FWIW, I tried calling the IRS hotline. Not helpful.
posted by bluelight to Work & Money (8 answers total)
You need to call a CPA who specializes in taxes. We may be able to recommend someone, tell us where you are and some kind Mefite will know a person.

A CPA can show you things that a regular person doesn't know about and wouldn't consider.
posted by Ruthless Bunny at 8:46 AM on May 28, 2014

Not taking the required distributions for 14 years is a big problem Also, the general rule is that distributions from a variable annuity are taxed as income, not capital gains. Yes you should get a CPA pronto. A good CPA should be able to work out a payment schedule with the IRS.
posted by jtexman1 at 8:57 AM on May 28, 2014 [1 favorite]

I understand I need to get a CPA but I have no idea how to find one or how to find a good one. Can someone lay out a very, very clear road map on how to find and decide on a CPA? We don't have a lot of money and I truly do not know the first step.
posted by bluelight at 9:01 AM on May 28, 2014

Are there local family friends who seem to be relatively financially stable? Especially good if you know any people who own a small business. Ask them. Otherwise, look for a firm that has a couple accountants, not just one--some of the solos are excellent but if you can't get any kind of personal recommendation, you've got a better chance of competence when there are several people there bouncing ideas off each other and your problem can more likely be directed to someone who's handled this before. Be frank about your financial limitations. On the other hand, if this money hasn't been touched in all this time and is going to need to start coming out now, I don't think it's unreasonable that part of those funds be earmarked for paying the accountant, it shouldn't be something you as the grandchild need to shell out for.
posted by Sequence at 9:12 AM on May 28, 2014 [3 favorites]

The first step is asking people you know and trust for a recommendation. Really, that's about it. You want someone who is friendly and who will teach as well as advise.

But you don't drive yourself nuts about this. As among your friends if they know anyone they'd recommend. You should find someone.

Then make an appointment, bring EVERYTHING to the appointment, the paperwork for the annuities, the statements, the Tax Returns, all of it.

Yes, it will cost a few hundred dollars. But that might SAVE a few thousand.

This isn't going to be a cheap problem to solve, but once it is solved, that means money coming in, and a better standard of living.
posted by Ruthless Bunny at 9:16 AM on May 28, 2014

Did you miss Bunny's suggestion that you tell us where you are? Or are you uncomfortable with sharing your location? If not, give us a basic location and one of us may know of a CPA or tax attorney in your area.

If you're uncomfortable with that then your two choices are interviewing them and/or referral listings. Angie's List includes accountants and there's high likelihood there are other operations that do this sort of thing in your area. Often your local library will have memberships with them for community use. You should walk in and ask them. Librarians are awesome.

For interviewing you should just call and give them a 15 second summary of the situation and ask them about an initial appointment. Many may offer free initial consultations.

I wonder if you're either using the wrong terms here or if you don't have as much of a problem as you think. An annuity is a financial instrument that you purchase and which then grows tax-deferred. An IRA is such a thing intrinsically.

so bought into a slew of variable annuities in 2000 without knowing what they were doing. My grandfather is now in his 80s and never withdrew his required distribution from his IRA variable annuity would mean they made a new IRA contribution after such point as your grandfather was 70? That's not really something you do - you take OUT of IRAs once you turn 70.

So if the strategy here was to further defer distributions by making a conversion of the IRA to a variable annuity then maybe it's not as bad as it could have been. Maybe that purchase was actually a distribution? You need that CPA.

There's ways to ask for forgiveness and perhaps your grandfather can blame family for bad advice if they were in a custodial role.
posted by phearlez at 9:57 AM on May 28, 2014

Someone on AskMe posted this link for the National Association of Personal Financial Advisors about a year ago, and it led me to a financial advisor that was perfect for our family (who also happens to be a CPA). Not everyone listed here are CPAs, but some are. They are all fee-based (which is good: they charge a flat fee for services rendered instead of relying on selling you products you don't need).
posted by anastasiav at 10:15 AM on May 28, 2014

Find a CPA/EA/tax attorney, as others have mentioned. Good resources for referrals would be friends who own businesses, your bank (if you like/trust them), someone you know who owns rental property, colleagues/bosses, etc.

As phearlez mentioned, you can request a waiver of the excise tax. Waiver is generally granted if:
-the failure to make RMDs it is due to reasonable error; and
-reasonable steps are being taken to remedy the shortfall.
(obviously both of those statements are full of terms of art)

There are certain cases where the tax is automatically waived (absent the IRS stepping in to say it can't be). See Q/A 7 under Treas. Reg. Sec. 54.4974-2.

Not doing this for 14 years is going to be a problem, especially as it appears this is not a recent revelation (i.e. your grandfather or the person managing his finances was aware of the requirement). However, sometimes distributions as an annuity can satisfy the RMD.

If all else fails, contact the taxpayer advocate.

Also, the excise tax is 50% of the amount that should have been distributed (i.e. RMD minus actual distributions), not 50% of the account balance. From the wording of your question, I couldn't tell whether you understood that part.
posted by melissasaurus at 10:46 AM on May 28, 2014 [2 favorites]

« Older The Wild West versus Gangs of New York   |   How to have hobbies and toddlers Newer »
This thread is closed to new comments.