If you missed a Required Minimum Distribution (RMD) here’s what to do

| February 13, 2015

Mike's Blog

We occasionally get calls from people as well as reporters about how to fix a missed RMD. RMD stands for required minimum distribution. This is the time of year when Required Minimum Distributions (RMDs) from IRAs are fresh on a lot of people’s minds. Real quickly, in general, an RMD is the amount that must be removed from a traditional IRA and other types of retirement plans when reaching age 70 ½. and it MUST be removed by December 31st of each year - or there’s a penalty! If you waited until the last minute and missed taking your RMD, read on, I’m going to tell you how to correct it.

DON’T HOPE IT WILL ALL JUST GO AWAY AND IGNORE IT. This only makes it worse. Withdraw the missed amount as soon as you find out. At this point it is important not to worry about who made the mistake. It doesn’t matter if was your error, or financial institution. Just remove the RMD immediately!

Then, report the missed RMD to the IRS. I mentioned a penalty earlier, it’s 50% of the amount that you missed. Yes that’s correct, a 50% penalty, one of the harshest penalties in the code. You report this on IRS Form 5329. You can file this with your tax return or as a stand-alone return. The IRS has the power to waive the penalty – for an acceptable reason. Make a note and remember, if you are requesting a waiver of the penalty, MAKE SURE you end up with zero on the last line of form 5329. It doesn’t help that the instructions are confusing. But if you end up with a number on the last line of the return, it will carry over to your income tax return, and the IRS will expect you to pay the amount shown on the last line.

If you are requesting a waiver, attach a note to Form 5329. Just explain what happened, and keep it simple. Explain that you corrected the error when you found out about it, and tell the IRS that it will not happen again. Write down the steps taken to ensure this. You’ll probably hear from the IRS in a few months on whether they have agreed to waive the penalty or not.

Filing form 5329 also starts the statute of limitations. Form 5329 is a stand-alone return according to the Tax Court. If you do not file a return, the statute of limitations does not start to run. The IRS can come back later and assess the 50% penalty, failure to file penalties, accuracy related penalties, along with interest on all those penalties! This is why you don’t want to ignore a missed distribution.

As always, check with you CPA or tax preparer before beginning this process.

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.