As its name implies, a Required Minimum Distribution (RMD) is a requirement. Once you achieve the age of 70 1/2, failure to take your required amount by December 31st could result in a penalty from the IRS. If an RMD is missed, or you only took a portion of the required amount, the IRS can levy a penalty of up to 50% of the amount not taken for that year.
For example, if the RMD for 2017 was $10,000 and you withdrew $6,000 for the 2017 calendar year, the penalty could be 50% of the difference, or $2,000. ($10,000 - $6,000 = $4,000. $4,000 x 50% = $2,000) If your RMD for 2017 was $10,000 and you didn’t take any withdraws, you could be subject to a $5,000 penalty.
Missed RMD’s happen a lot more often than you might think. Many assume that their financial professional will take care of it for them, or that the custodian (ie: Schwabe, Vanguard, Ameritrade…) is responsible for enforcing the RMD. This isn’t the case however. Custodians are not mandated to automatically issue the RMD from a retirement account unless you sign their applicable paperwork requesting them to do so. Although a good investment manager will remind you that the RMD must be taken and assist you in determining the proper amount, they are not required to do so either. As far as the IRS is concerned, the burden falls on the shoulders of the owner.
So what should you do if you missed taking the distribution before the December 31st deadline?
1. The first thing you should do is determine your required minimum distribution and take it. Do this in a reasonable period of time. Your financial professional or CPA can help you with this, or you can use the RMD calculator on the FINRA website.
Depending on the number of retirement accounts that you have and the type of account that they are, you may, or may not, be able to take your total RMD from a single retirement account. Here is an excerpt from FINRA’s FAQ’s on required distributions from retirement accounts:
Can I just take the RMD from one account instead of separately from each account?
This one's a little tricky. If you are a traditional IRA owner, you must calculate the RMD separately for each traditional IRA that you own, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
2. Your IRA custodian is required to report your IRA transactions to the IRS annually, so the information is available to them regarding whether or not you took your RMD. Now that you have taken the RMD you should complete Section IX of Form 5329 to notify the IRS that you have corrected your mistake. This is a quick and easy form and does not require an amended return since you didn’t take the distribution during the previous tax year and therefore have no additional income to report.
As I mentioned earlier, the IRS can levy a penalty of up to 50% of the amount not taken for that year. Many people do not have to pay this penalty because the IRS tends to be empathetic to those who are correcting their mistakes. The IRS knows that a 50% penalty is excessive and provides step-by-step instructions on how to request a waiver of the penalty in the “Instructions for Form 5329”:
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.
Complete lines 52 and 53 as instructed.
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.
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.
What they are asking you to do is to provide a written/typed explanation regarding why the RMD was not taken correctly. The key to getting the penalty waived is showing that the mistake was a “reasonable error” and that you are taking “reasonable steps to remedy the shortfall.”
Follow those steps and you should be just fine. Good luck.
Kevin Warman, CIMA®, RMA®
(Last Updated 7/16/2018)