Forgot to Take an RMD? Steps to Avoid Penalties and Fix It
Learn how to address missed RMDs, avoid penalties, and navigate the correction process with practical steps and documentation guidance.
Required Minimum Distributions (RMDs) are a critical part of managing retirement accounts, ensuring funds are withdrawn and taxed at the appropriate time. Missing an RMD can lead to significant financial penalties, underscoring the importance of timely compliance.
Penalties for Missing an RMD
Failing to take an RMD from a retirement account can result in a steep financial penalty. As of 2024, the IRS imposes a 25% excise tax on the amount not withdrawn, reduced from the previous 50% rate. For instance, if an individual was required to withdraw $10,000 but failed to do so, they would incur a $2,500 penalty. The IRS generally requires RMDs to be taken by December 31 each year, though individuals reaching age 73 can delay their first RMD until April 1 of the following year. Missing these deadlines can complicate tax planning, potentially increasing overall tax liability.
Methods to Correct the Oversight
Correcting a missed RMD requires swift action. Begin by calculating the amount that should have been withdrawn, using the account balance as of December 31 of the prior year and the IRS Uniform Lifetime Table. Once the missed amount is determined, withdraw it as soon as possible. Consulting a financial advisor or tax professional can help ensure this correction aligns with broader financial goals and avoids creating additional tax challenges.
Documentation and Tax Forms
Addressing a missed RMD demands thorough documentation. Gather records of account statements, prior withdrawals, and any communication with financial institutions. These records are essential for demonstrating compliance efforts to the IRS. Complete IRS Form 5329 to report the missed RMD and calculate the excise tax. In Part IX of the form, specify the missed distribution and the penalty amount. If requesting a penalty waiver, include a statement explaining the reason for the oversight and the corrective actions taken, such as a medical emergency or other unforeseen circumstances.
Requesting Penalty Waivers
The IRS allows individuals to request a waiver of the penalty for a missed RMD under specific conditions. To strengthen your case, provide a clear explanation of the circumstances that led to the oversight, such as health issues or errors by the financial institution. Include supporting documentation, such as medical records or correspondence with the institution. Demonstrate good faith by detailing the steps taken to address the issue, including promptly withdrawing the missed RMD. Clear communication and strong supporting evidence can improve the chances of securing a waiver.