By Andy Ives, CFP®, AIF®
Every year thousands of traditional IRA account owners turn 70 ½ years old. In addition, each year thousands of younger non-spouse beneficiaries inherit traditional and Roth IRA accounts. What do these two groups of people have in common? They all must begin taking RMDs. Here’s the kicker – what’s the chance that every single one of these thousands of people fresh to the world of required minimum distributions A.) realizes they need to take an RMD; B.) knows the deadline for taking the RMD; and C.) actually takes it?
I say the chance is 0%. In fact, I would be willing to bet my house and my son’s grandparent’s house and my car that someone in the world will fail to take their RMD before the end of this year. And we are not even talking about the hundreds of thousands of people over 70 ½ who are already deep into their RMD years. It’s as certain as the sunrise in the morning and as leaves falling in autumn. Death, taxes and missed RMDs.
The penalty for missing a required minimum distribution? Nothing to sneeze at. Fifty-percent. Five-Oh. One half of whatever the RMD that was supposed to be withdrawn. For example, an 83-year-old with $250,000 remaining in his IRA has a life expectancy of 16.3 years according to the Uniform Lifetime Table. $250,000 divided by 16.3 equals a $15,338 RMD. Miss the December 31 deadline and he is staring at a penalty of $7,669.
The 50% missed RMD penalty is one of the harshest punishments in the tax code. But do not fret! Here are 5 steps to (hopefully) save the day:
1. Withdraw the missed RMD as soon as possible. There is no chance of relief from the penalty until this is done.
2. Report the mistake to the IRS on Form 5329. Form 5329 can be filed along with the annual tax return for the year the RMD is finally distributed. It can also be filed as a stand-alone return.
3. Complete the form as follows:
- On line 52, report the RMD that should have been distributed.
- On line 53, report the amount that was distributed before the deadline. This will be “0” if nothing was withdrawn by the deadline.
- In parentheses on line 54, write “RC” (for reasonable cause) and list the amount you want waived. If you are requesting a full waiver of the missed RMD, the total amount will be listed on the dotted lines next to RC and within parentheses [e.g. “RC ($7,669)”]. If you are requesting a full waiver, enter “0” on line 54.
- On line 55, report the penalty that is due. Again, if you are requesting a full waiver, you should enter “0.”
- Attach a brief letter to the return explaining how the mistake occurred, what you did to fix it, and how you are making sure it doesn’t happen again.
4. Do not pay the penalty! Wait for IRS approval or denial. If denied, the IRS will send a notice requesting payment.
5. If multiple RMDs have been missed, file a separate 5329 for each year.
The penalty for a missed RMD is harsh, so be sure to withdraw your required amount annually. If you fail to take the distribution, there is no guarantee the IRS will waive the penalty. However, by following these steps you will at least be on the path to potential forgiveness.