Reduce tax penalty from IRA mistake

Dear Liz: I have missed three years of required minimum distributions from one of my IRAs although I have not heard from the IRS about this. What do you advise me to do now?

Answer: Did you include this account when calculating your required minimum distribution each year? If so, you won’t owe a penalty.

You’re supposed to calculate RMDs for each of your IRAs, but you don’t have to withdraw money from each account.

Instead, you can take the year total from any of your IRA accounts.

If you forgot to include this account in your calculations, however, then you would typically owe a penalty.

In the past, people who failed to take their RMDs faced a 50% penalty on the amount they should have withdrawn but didn’t.

Starting in 2023, the penalty has been reduced to 25%, or 10% if the oversight is corrected within two years of the RMD’s due date, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

You can request a complete waiver of the penalty if you can show the failure was due to reasonable cause and that you are taking steps to correct the oversight, Luscombe said.

You’ll need to file Form 5329 and attach a letter explaining why you failed to withdraw the proper amount.

Finding a fiduciary advisor

Dear Liz: I am having difficulty finding a fiduciary, fee-only financial adviser. I have inherited considerable investments from my parents’ trust and now that their house is sold, there will be a payout in excess of $1 million. I believe that my parents’ money manager has done an excellent job of investing and managing their money, so I want to stay with him. My IRA is with another money manager. Without any personal recommendations, I do not know how to go about selecting a financial adviser from a list of advisers on the internet. Interviewing and selecting one based on likability makes me uneasy.

Answer: If anything makes you uneasy, it should be that an adviser isn’t required to look after your best interests.

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard.

That means they’re allowed to recommend investments that are more expensive or that perform worse than available alternatives, simply because the recommended investments pay the adviser more.

You can start your search for fiduciary, fee-only advisors by getting referrals from the National Assn. of Personal Financial Advisors, the Alliance of Comprehensive Planners, the XY Planning Network or the Garrett Planning Network. LetsMakeAPlan.org has a list of questions to ask.

Card closure reasons don’t matter

Dear Liz: Does the reason for a

A fiduciary is someone who is committed to putting their clients’ interests ahead of their own. Most financial professionals are not fiduciaries and are typically held to a lower “suitability” standard. That means they’re allowed to recommend investments simply because they pay the adviser more.

credit card closure affect credit scores? I’ve had retailers close a card simply because it hasn’t been used for a period of time, not because I mishandled the account.

Answer: Credit score formulas don’t distinguish between accounts closed by the consumer and accounts closed by the issuer.

The closed account can still ding your scores, but you won’t suffer an extra blow because the decision to close wasn’t your own.

Don’t make handwritten will changes

Dear Liz: I have a question about wills. Since circumstances change over time, is it permissible to make “pen and ink” changes to a will? For example, can I cross out a beneficiary that no longer applies and date and initial the cross-out?

Answer: Think about how easy it would be for someone else to alter your will with a pen and a reasonable facsimile of your initials.

Then you’ll understand why states typically require people to be a little more deliberate about changing their estate documents.

Even when handwritten changes are allowed, they’re usually not advisable.

Any money you save by not seeing an attorney could be spent many times over in legal fees, since handwritten changes would be susceptible to challenges in court.

Is that what you really want for your heirs?

Small alterations to estate plans can be handled with properly drafted and witnessed documents known as codicils.

But you’re often better off creating a new document and revoking the old one, especially when changing beneficiaries.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.