(August 25th, 2009)

If you have an Individual Retirement Account (IRA), you should know that your IRA custodian must provide you with a year-end statement of the value of your IRA. Typical year-end statements include the fair market value statement, IRS Form 1099-R, notice of minimum required distributions (RMDs), etc; and these forms must be mailed to you by January 31st, of the year following the pre-ceding tax year. In this article, we will briefly explore each of these statements.

1) Fair Market Value Statement

The fair market value statement, as the name suggests will tell you the closing balance of your IRA account as of December 31st, of the preceding year. The closing balance of your IRA at year-end is especially important for those people who are 70 and ½ years of age or above because it is this number that will be used with the life expectancy ratio to calculate the minimum required distribution for that year. The minimum required distribution formula is as follows:

Required Minimum Distribution = Previous Year’s 12/31 Balance / Life Expectancy Age

For instance, consider Bohemia is 70 and ½ years of age and his traditional IRA has $145,000 in it. According to the life expectancy schedule, Bohemia’s life expectancy at 70 and ½ years will be 27.4 years. Therefore, the minimum required distribution will be:

Required Minimum Distribution = Previous Year’s 12/31 Balance / Life Expectancy Age

Required Minimum Distribution = $145,000 / 27.4 years = $5292

The closing fair market value for the year should be clearly shown on your IRA year end statement and this number will also be reported to the IRS.

2) Required Minimum Distribution Notice

Starting 2004, if you reach 70 and ½ years in any of the following years, you must receive a minimum required distribution notice from your IRA custodian. The IRA custodian must calculate the amount for you, or at least offer to do so upon request.

3) IRS Form 1099-R

The purpose of IRS form 1099-R is to report any distributions of amounts from any pension plans, profit sharing plans, IRAs, 403b plans and annuities that the investor received as well as any re-characterizations between traditional and Roth IRAs. Re-characterization is basically the conversion of a Roth IRA to a traditional IRA or from a traditional IRA to a Roth IRA. The IRS form 1099-R will also state the taxable amount of your distributions but it is upon you to ensure that this reporting is correct.

For instance, say you received a distribution of $12,000 from your IRA in 2008 and the custodian may indicate on form 1099-R that the full $12,000 is taxable, however this may not be 100% accurate. Therefore, it is upon you the IRA holder to verify this number and its accuracy, and report any errors to the IRA custodian right away without delay. If you fail to notify the IRA custodian right away to make changes, you will end up paying penalties and taxes on distributions that should otherwise be free of charge.

A typical error that could be made is, say you withdrew $10,000 from your IRA towards the purchase of a new home. Although the IRS says that this $10,000 distribution for the purchase of your new home is not subject to early withdrawal penalty, your IRA custodian may not know about this, and may report this distribution as a cash out withdrawal without reason to the IRS. It is then your responsibility to inform the custodian of the purpose of your distribution (to buy a new home) and that you are exempt from any penalties/taxes.

Another classic example is when a direct trustee-to-trustee rollover is performed. Say you did a direct rollover of $25,000 from your old employer’s 401(k) plan to your new IRA. This $25,000 distribution will be reported on your IRS form 1099 however if you roll it over to an IRA account within 60 days, then you should NOT be subject to early withdrawal penalty or the 20% withholding tax that is popular among rollovers. Here are the steps to perform if your IRA custodian records this $25,000 distribution that you rolled over to an IRA as fully taxable:

i) Inform the IRA custodian that you rolled over this money to an IRA within the 60 day rule and ask him to delete the fully taxable status.

ii) Get a hold of IRS form 1040 and input $25,000 as the distribution amount (line 15a), and $0 as the taxable amount (line 15b). Provide supporting documentation of the $25,000 rollover to an IRA within the 60 day period.

In conclusion, what are you supposed to do with all these statements apart from recordkeeping? Well it is not necessary to attach these documents with your tax return, so make photocopies and file the originals for later. The only form that you must attach to your tax return is the IRS form 1099-R that reports your distributed amounts.