RMD Mistake: Failing to Take Your RMD

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Required Minimum Distributions (RMDs) are, as their name suggests, required. If you don’t withdraw the required minimum by December 31st, then the IRS charges you a 50% penalty on the money you should have withdrawn.

That 50% penalty is called an “Additional Tax on
Excess Accumulation” by the IRS and is reported on Part IX of IRS Form 5329.

The reporting is simple.

  • Line 52: What was your minimum required distribution for the tax year?
  • Line 53: What amount did you actually distribute?
  • Line 54: What amount of your RMD did you fail to take? (Subtract line 53 from line 52)
  • Line 55: Additional tax. Enter 50% (0.50) of line 54. Include this amount on Form 1040, line 59, or Form 1040NR, line 57

That being said, many people do not end up having to pay this tax even though they failed to take their RMD because the IRS is in the business of providing waivers to people who correct their mistakes. In fact, waivers are so common that the form instructions for this part say:

Waiver of tax.
The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.

  1. Complete lines 52 and 53 as instructed.
  2. Enter “RC” and the amount you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 54.
  3. Complete line 55 as instructed. You must pay any tax due that is reported on line 55.

The IRS will review the information you provide and decide whether to grant your request for a waiver.

The reason they have this provision is because RMD rules apply only to the people most prone to forget to take them: the elderly and the bereaved. Slam dunk waiver cases (in my opinion) are things like the IRA owner being hospitalized or developing dementia and thus missing taking the RMD for this or several years.

The key to getting the waiver, though, is showing that “you are taking reasonable steps to remedy the shortfall.” If you missed some or all of your RMD, this is easily accomplished by just taking out what you missed when you notice the mistake.

If you’ve missed multiple years of RMDs, this means estimating how much should have come out over those years and distributing it as soon as possible. You would likely benefit from attaching a sheet explaining the math you used since there are multiple reasonable ways to do the calculations as well as statements showing the distributions. Distributing the funds so that each year of RMD missed is its own transaction on your statement may help too.

And please don’t miss taking your RMD from an Inherited Roth IRA. I can imagine no sadder RMD mistake than having to pay a 50% tax on a distribution your loved one hoped would be tax-free.

Photo used here under Flickr Creative Commons.

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Megan Russell has worked with Marotta Wealth Management since 2005. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine