Penalty on Roth RMD

[StevenL]

Client has inherited Roth IRA from her father who passed away in 2008. She was not aware that she had to take RMD within 5 years and now faces possible 50% penalty. She would like to request a waiver of this penalty. Should she request the waiver when the return is filed with the penalty amount as part of the return or should we leave the penalty part off the return and wait until the IRS assesses the penalty before requesting the waiver?

Your advise is greatly appreciated.

 

 

 

[Ram32]

Did a quick Google search and located the following:

The first and most important rule to remember regarding income taxes is the five-year rule. A Roth IRA must have been established for at least five years before its earnings can be withdrawn exempt from any income taxes. These earnings become tax-free starting on the first day of the fifth taxable year after the Roth IRA’s establishment. If the early withdrawal of earnings is not due to premature death, a 10% distribution penalty is levied in addition to regular income tax. If it is due the holder’s death, then the 10% distribution penalty does not apply. If the five-year requirement is satisfied, then beneficiaries can take out the Roth IRA’s earnings tax-free, without regard to the ages of the decedent or beneficiary.

I know there is a lot of confusion on Roth IRA's  and what is taxable or not. Hope this helps and starts your search to find solid info for your client.

[Gail in Virginia]

I have not had this particular situation, but I think that I would file the penalty completely separate from the regular tax return and request the waiver with the filing, but not pay the tax until the waiver is denied.  I hope that you will keep us advised on what you decide to do and how it turns out for your client. 

[Jack from Ohio]

When did a ROTH become subject to RMD?  Did I miss something?

[Abby Normal]

4 minutes ago, Jack from Ohio said:

When did a ROTH become subject to RMD?  Did I miss something?

Inherited Roths are subject to RMD requirements. Not sure when that became law. And laws have been proposed to make the owner of a Roth subject to RMD, but none have passed yet.

[Abby Normal]

Generally, you file 5329 with the return. You should only do it separately if you're not required to file a return.

[Gail in Virginia]

I know the instructions say to file together.  I did that for a client who owed the penalty on a regular IRA.  She paid the penalty with her return.  I never convinced the IRS that it was filed and paid before she died and they gave up trying to collect the 50% penalty twice.  Even though I resubmitted copies over and over.  And talked to people on the phone.  And wrote letters. That is why if I do it again I will do a separate submission.  And not pay the penalty before requesting the waiver.  Most frustrating experience I ever had with IRS.

[JohnH]

It's also OK to file it separately if the error is discovered after the return is filed. RMD's on inherited Roth IRA's are a little outside the norm, so it would easily be possible to justify the separate filing.  Also, when you write the letter, you'd want to know if the Roth IRA was moved to another trustee, and what information the old or new trustee gave to the client regarding the necessity of RMD's in this situation.

 Having done nothing during the entire 5-year period might actually work to the client's advantage.  Mainly you want the letter to be so pitiful it will make them cry.

[GeneInAlabama]

1 hour ago, JohnH said:

It's also OK to file it separately if the error is discovered after the return is filed. RMD's on inherited Roth IRA's are a little outside the norm, so it would easily be possible to justify the separate filing.  Also, when you write the letter, you'd want to know if the Roth IRA was moved to another trustee, and what information the old or new trustee gave to the client regarding the necessity of RMD's in this situation.

 Having done nothing during the entire 5-year period might actually work to the client's advantage.  Mainly you want the letter to be so pitiful it will make them cry.

IRS?  Cry?  !!!

 

[StevenL]

Thanks for all the replies and comments. In this situation, I'm most inclined to agree with Gail in Virginia and file the return without the penalty and request the waiver at that time. My client did write a rather pitiful letter that I plan to include with the return when I file it. I really hope it helps her in this situation as the penalty would amount to about $3500!

[Abby Normal]

When and Where To File

 

File Form 5329 with your 2015 Form 1040 or Form 1040NR by the due date, including extensions, of your Form 1040 or Form 1040NR.

If you do not have to file a 2015 income tax return, complete and file Form 5329 by itself at the time and place you would be required to file Form 1040 or Form 1040NR. Be sure to include your address on page 1 of the form and your signature and the date on page 2 of the form. Enclose, but do not attach, a check or money order payable to “United States Treasury” for any taxes due. Write your SSN and “2015 Form 5329” on the check. For information on other payment options, including credit or debit card payments, see the instructions for Form 1040 or Form 1040NR, or go to IRS.gov.

[jasdlm]

7 hours ago, Abby Normal said:

Generally, you file 5329 with the return. You should only do it separately if you're not required to file a return.

I agree.  On the 5329, there is a way to waive the penalty and assume that the IRS will agree.  I have always filed this way, with the return and not separately, and I have never had it questioned.

[StevenL]

Could you please tell me, where on the 5329, you can waive the penalty? Thanks for your help.

[jasdlm]

On Line 52, enter the MRD that should have been taken.

On Line 53 (if you use ATX), click on the arrow, and it will take you to a waiver explanation.  Enter the full amount that should have been taken, and enter you explanation in the blue box.