Year-End IRA Deadline Falls on a Saturday

By Marvin Rotenberg, IRA Technical Expert

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, 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 forward to the previous business day.

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 clients 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. Second, cross your fingers and hope you catch the IRS case officer on a good day so that he or she will agree to your request.

A similar problem applies with respect 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 that were taken in accordance with the 72(t) program and made after you reached age 59 ½.

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 insure 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, rather than the last. Better to receive your payments a bit early than to risk the imposition of tax penalties for events that are not your fault.