The IRS is taking a fresh interest in IRAs.
Individual Retirement Arrangements (IRAs) hold trillions of dollars. These dollars are sheltered from taxes, for the most part until the owners decide to take distributions. The IRS discovered, however, that IRAs are a rich goldmine of unpaid taxes and penalties, because taxpayers are not following all the rules. Recently the IRS studied a sample of IRA owners over age 70½ and found a high percentage of those with large IRAs were not taking their required minimum distributions (RMDs).
Here’s what you need to know to avoid problems with the IRS.
Congress suspended RMDs for 2009 to help IRA owners who didn’t need the distributions to let their balances recover from the investment declines of 2008. But the suspension was for only one year, and there’s no indication Congress plans to suspend RMDs retroactively for 2010 or for any future year.
The IRS receives up to two reports from IRA custodians for each IRA with an owner over age 70½. One report is Form 1099-R that reports the amount of distributions for the year from every IRA. The IRA owner also receives a copy of this form.
The other report is Form 5498. This provides the IRS with basic information about the owner of each IRA: Name, address, Social Security number, IRA balance, and whether an RMD was required for the year.