October Key Focus
Year-End IRA Deadline Falls on a Saturday
We recently informed you that the recharacterization deadline for
2010 Roth IRA conversions is generally October 15th of the year
following the year of conversion. This year, however, the
deadline is October 17th because the 15th falls on a Saturday.
Tax-related deadlines falling on a weekend or holiday are
extended to the next business day. However, when December 31st
falls on a weekend, like it does this year, the deadline is pushed up
to the previous business day for year-end related issues.
The payment systems of many IRA custodians are programmed to
pay month-end distributions on the first business day of the
following month when the month-end falls on a non-business day.
For these custodians, it means that distributions scheduled to be
paid on December 31, 2011 would instead be paid on January
2, 2012. This would lead to tax penalties for those who must take
required minimum distributions (RMDs) or 72(t) (substantially
equal periodic payments) during the 2011 calendar year.
The problem for RMDs is the 50% penalty that is assessed on any
missed payments. For example, if a $5,000 RMD scheduled to be
paid on December 31, 2011 does not get distributed until
January 2, 2012, the resulting penalty owed by the account owner
is $2,500. Avoiding such a penalty in this case is a two-step
process. First, a written request for a waiver of the penalty must
be made to the IRS, providing a legitimate reason as to why the
payment was late. Then cross your fingers and hope you catch
the IRS case officer on a good day so that he or she agrees to your
A similar problem applies to 72(t) distributions that are supposed
to be paid by the last business day of the year. If pushed to the
beginning of the next year, the 72(t) would be considered
modified, resulting in the IRA owner owing a 10% early
distribution penalty on all distributions taken under the 72(t)
program since its inception. The penalty would not apply to any
distributions taken in accordance with the 72(t) program and made
after you reached age 59 1/2.
A word of advice is in order if you are scheduled to receive one
of these payments at year end. Check with your IRA custodian to
ensure that it has taken appropriate steps to prevent the carry-over
of payments to the next year. For regularly scheduled payments,
a sure-fire way to avoid this problem altogether is to switch your
payment date to the first day of the payment period. It is better to
receive payments early than risk the imposition of tax penalties for
events out of your control.