If You Missed Your Required Minimum Distribution (RMD)

| January 01, 2018
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Every year, traditional IRA owners must take what is called a required minimum distribution, or RMD, from their IRA after they turn age 70 ½. If you fail to remove this IRS mandated distribution, then you have to pay a 50% penalty on the amount that was supposed to come out. Thankfully, if the mistake is caught and proper action is taken, this is one penalty that you may be able to escape from paying. The IRS has the authority to waive the 50% RMD penalty when the shortfall is due to a "reasonable error".

The first thing you should do after discovering your RMD was missed, is take immediate corrective action. You should calculate the shortfall of the RMD, and then remove that amount as soon as possible from the IRA in question. Next, you’ll need to file form 5329; this form can be filed with your tax return or by itself. As long as you are requesting that the 50% penalty be waived, payment does not have to be made when the forms are filed.

Along with the form 5329, you should write and attach a letter, explaining the shortfall and the steps taken to rectify the error. There's no real formal guidance on what a “reasonable error" is, but some potential explanations that might pass the IRS scrutiny test includes: illness, a death in the family, a change in address that disrupted essential communication regarding the RMD, or that you relied upon incorrect professional advice.

The final step in what will hopefully be a successful abatement of the 50% penalty, is to indicate in the letter that you are now aware of the rules and will continue to take RMDs correctly going forward.

You can expect to receive a notice from the IRS within a few months after submitting the form 5329, hopefully confirming that the IRS has indeed waived the penalty.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

 

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