How Do You Fix a Missed RMD in 5 Easy Steps?

Managing retirement accounts involves adhering to regulations like taking Required Minimum Distributions (RMDs). Missing an RMD can lead to significant IRS penalties, so addressing any oversight promptly is crucial. Correcting a missed RMD efficiently helps ensure compliance and reduces financial consequences.

Verify RMD Calculation

Start by confirming your RMD calculation is accurate. This involves reviewing the original computation based on the account balance as of December 31 of the prior year. Use the IRS life expectancy tables, such as the Uniform Lifetime Table, to determine the RMD. Ensure the correct table and factor are applied, as errors can result in penalties.

Include all relevant accounts in the calculation. For multiple IRAs, calculate the RMD for each account individually, though the total RMD can be withdrawn from one or more accounts. For 401(k) plans, each account must meet its own RMD requirement. Overlooking any account can lead to an incomplete RMD and potential penalties.

File IRS Form 5329

Once the RMD calculation is verified, file IRS Form 5329 to address the missed distribution. This form reports additional taxes on qualified plans, including IRAs. Part IX of the form is used to calculate the excise tax on missed RMDs. The penalty is generally 25% of the amount not withdrawn, though recent legislation allows it to be reduced to 10% if corrected quickly.

Complete the taxpayer information section accurately, ensuring all personal and account details are correct. In Part IX, calculate the missed RMD amount and the applicable excise tax. If you qualify for a penalty waiver, attach a statement explaining the circumstances and steps taken to fix the issue.

Request a Penalty Waiver

If reasonable cause exists for missing the RMD, request a penalty waiver. The tax code allows for a waiver if the shortfall was due to reasonable error and corrective actions are being taken.

Provide a clear explanation of the circumstances that caused the missed RMD, such as personal emergencies or administrative errors. Include supporting documentation, like medical records or correspondence with financial institutions. Outline the corrective actions taken to address the oversight.

Demonstrate why the error was reasonable and describe measures to prevent future mistakes. This could involve updating financial management tools, scheduling regular account reviews, or seeking advice from a financial advisor. Show the IRS that the missed RMD was an isolated incident and that steps are in place to ensure compliance moving forward.

Issue the Corrected Distribution

To comply with IRS requirements, promptly issue the corrected distribution. This demonstrates an effort to resolve the issue in good faith.

Work with the financial institution managing the account to distribute the correct amount. Communicate the urgency and reason for the withdrawal. Be mindful of the tax implications, as distributions from traditional IRAs or 401(k)s are subject to ordinary income tax. Consider how the additional income will affect your tax liability for the year and plan accordingly.

Document the Correction

Keep detailed records of all actions taken to address the missed RMD. Proper documentation is essential for compliance and can serve as evidence if the IRS requests additional information or conducts an audit.

Retain copies of the original RMD calculation, IRS Form 5329, the penalty waiver request, and proof of the corrected distribution. This includes bank or brokerage statements and any correspondence with financial institutions. Document the timeline and steps taken to resolve the issue.

To prevent future problems, create a system to track RMD deadlines and amounts annually. Use calendar reminders or consult a financial advisor to ensure ongoing compliance. By addressing the current oversight and implementing these strategies, you can manage retirement account distributions effectively.