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Every year thousands of people fail to take their Required Minimum Distributions (RMD) from their IRA, 401k or other retirement accounts.
Considering the complexity of the rules and all the changes regarding your retirement accounts in recent years -- the RMD beginning date has changed from 70 ½ to 72, changes to RMDs for inherited accounts , and the CARES Act waived RMDs altogether for 2020 -- it’s no wonder so many people miss this important deadline.
In most cases, your IRA custodian, retirement plan administrator or financial adviser will notify you when you must take your RMD and what the distribution amount should be to avoid trouble with the IRS. Nevertheless, some people will still fail to take their RMD on time. Unfortunately, the penalty for a missed IRA RMD is 50% of the RMD amount.
If you missed yours, there are some steps you can take to fix the problem and avoid penalties.
First, go ahead and take your RMD now. Better late than never. To avoid the penalty, you will have to demonstrate to the IRS that you did take your RMD. To keep the accounting simple, try to avoid commingling this distribution with your 2022 RMD. For example, if your 2021 RMD was $18,732, take a distribution in that amount now. Take your 2022 distribution separately. It will help you keep track of things later if/when you need to produce a confirmation statement or other documentation of your distribution.
Second, file IRS form 5329. You can download that here. You don’t have to prepay the penalty, but if the IRS declines your request for a waiver, you could owe interest on the penalty in addition to the penalty itself.
Third, attach a letter of explanation. The IRS has the power to waive the penalty for “good cause”. Here is your chance to plead for mercy. Explain that you have taken your RMD, albeit a little late, and that you have taken steps to ensure this won’t happen in the future.
Then you wait. And wait. And maybe wait some more.
Like everyone else the IRS is swamped and short-staffed right now. You could end up waiting for quite a while before they grant your waiver. In my experience, most people who have good cause and who take proper steps to fix the situation are eventually granted a waiver to the RMD. Also in my experience, people who totally blow this off usually hear about it from the IRS about 18 months later – along with a bill for interest and additional penalties, and little tolerance for a waiver request.
In case you don’t know: I am not a tax professional. Nor am I a representative of the IRS. As always, check with your tax professional or the IRS directly on all tax matters.
Note: Royal Alliance does not provide tax or legal advice.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.