Missing the year-end deadline for some IRA transactions may mean missing opportunities to save taxes or be subject to excise taxes.

If you are one of the more than 60 million individuals with an IRA, you may need to complete some IRA transactions by the end of this year.

Meeting this deadline may mean taking advantage of tax planning strategies or avoiding the IRS-assessed sales tax for the year. Here is a high-level overview of 5 common IRAs that usually need to be completed by the end of the year.

1. Rhythmic Movement Disorders: If you are under 72 years old by the end of the year

If you own a Traditional IRA, SEP, or SIMPLE (Traditional IRAs) and are at least 72 years old by December 31 of this year, you must take the required minimum distribution (RMD) from your IRA for the year. Generally, the RMD must be distributed to the IRA owner from the IRA by the end of the year. However, if you turn 72 this year, you will have an extended deadline to April 1 of next year to take this year’s RMD. The April 1 date (April 1 after the year you turned 72) is the Required Start Date (RBD). The RBD is the deadline by which an IRA owner must begin taking RMDs.

If you miss the deadline

If you miss your RMD deadline, you will owe the IRS a 50% excise tax on any shortfall. For example, if your RMD is $10,000, and you only withdraw $5,000 by December 31 (April 1st of next year, if you just reached age 72 this year), you will owe the IRS a $2,500 excise tax (50 % of the $5,000 shortfall).

Your RMD Notice

Your IRA trustee must send you a Notice of RMD by January 31 of the year for which you are supposed to obtain an RMD. Your RMD notice must include either the calculated RMD amount or an offer to calculate the amount on demand.

Please provide a copy of your RMD notice to your tax advisor, so that they can review any RMD account provided by your IRA trustee and make adjustments if necessary.

RMDs do not apply to Roth IRA owners.

2. RMDs: for some inherited IRAs

If you inherit an IRA, you may need to take an RMD from that inherited IRA.

Whether you should get an RMD as a beneficiary is determined by several factors including your relationship to the IRA owner, whether the IRA was inherited before 2020, and whether the IRA owner passed away before they were required to start taking their RMDs .

Beneficiary RMDs apply to both traditional and Roth IRAs.

Your IRA custodian is not required to account for your RMD for any inherited IRA.

If an IRA owner dies this year

If an IRA owner died this year and was supposed to take an RMD but didn't, you will need to take that RMD. RMD is calculated as if the owner had lived to the end of the year.

The deadline for taking the RMD the owner should have taken is the end of the year. However, the 50% excise tax is waived if you take it by the due date of this year's tax filing, plus extensions.

If an IRA owner dies before this year

If the owner of the IRA passed away before this year, you are required to take the RMD this year only under the following circumstances.

  • If the five-year rule is applied and the five-year period ends this year: The terms of the IRA agreement may require application of the five-year rule if the owner of the IRA dies before 2020, and the death occurred before the RBD of the owner of the IRA. Under the 5-year rule, distributions are optional until the end of the fifth year following the year in which the IRA owner died, at which time the balance must be distributed in full. 2020 is not counted for this, because the RMDs were waived for IRAs for 2020. As a result, the 5-year period would expire this year if the IRA were inherited in 2016. In this case, the full balance remaining at the end of the year would be the RMD.
  • If the life expectancy rule is applied: The life expectancy rule means that distributions must exceed the life expectancy of the beneficiary. Unless the owner dies at or after the RBD and the life expectancy is longer than that of the beneficiary, in which case the owner's life expectancy will be used to calculate the RMDs.

When the life expectancy rule applies, distributions must begin by December 31 of the year following the year in which the IRA owner died and continue each year thereafter until the end date as required by governing RMD regulations.

Check with your IRA's trustee to determine which RMD rules apply to any IRAs you inherit.

Like IRA holders, beneficiaries will owe the IRS a 50% selective tax on any RMD not taken by the deadline.

3. Eligible charitable distributions

If you are at least 70 years old, you can make a Qualified Charitable Distribution (QCD) from your Roth IRA - including a beneficiary IRA. A QCD is excluded from your income if it meets certain requirements. These include:

  • It must be distributed from your IRA on or after the date you turn 70 ยฝ.
  • It must be payable to an eligible charity.
  • It must be made of IRA. Any IRA - including inherited IRAs - is eligible unless the IRA is an SEP or SIMPLE IRA that received an SEP or minor contribution during the year.

The QCD must leave the IRA by December 31 to count for this year.

If you are at least 72 years old, you can use your QCD to satisfy your RMD. For this to work, the QCD must be distributed before other distributions that satisfy your RMD.

to cautionIf you make deductible traditional IRA contributions for the year you turn 70 or later, tell the tax preparer, as the non-taxable portion of your QCD may need to be reduced by those deductible contributions.

4. SEPP

EPP
/ 72

Distributions taken from your IRA before you reach the age of 59 are subject to a 10% surcharge (early distribution penalty) unless you qualify for an exception. One such exception is distributions made under a greatly equal periodic payment program (SEPP)โ€”commonly referred to as a 72

SEPP/72

5. Roth IRA Transfers: Benefit from Tax-Free Growth

Transferring assets from a traditional IRA to a Roth IRA will cause any subsequent earnings to be tax-deductible once you qualify for a qualifying distribution. A distribution is eligible if it took at least five years after you funded your first Roth IRA, and you're at least 59 years old or disabled or have withdrawn up to $10,000 for the purposes of a first-time home buyer. In contrast, income tax must be paid on any pre-tax amount included in the transfer in the year the transfer is made, by the tax filing due date.

This tax-free opportunity is a tax effective trade-off for paying income tax now for those for whom a Roth is more suitable than a traditional IRA. Ideally, a suitability assessment should be conducted to determine if a Roth conversion is right for you.

Assets must leave the traditional IRA by December 31 for the Roth conversion to apply to this year.

Some financial institutions have early deadlines

While the legal deadline for these transactions is December 31, some financial institutions have earlier deadlines. These earlier deadlines were set to help ensure they could handle the flow of applications that would normally be submitted towards the end of the year. Those with deadlines before December 31 will often ensure that applications received by a certain deadline will be completed by the end of the year. Applications received after deadlines are usually completed on a best efforts basis.

Consult your tax advisor

The information provided here is just a high-level overview, and solutions are usually profile dependent. What applies to you may be different from what applies to others. If these or any other IRAs apply to you, please do not hesitate to consult your tax advisor.