One of the steepest penalties in the IRS tax code comes from missing a Required Minimum Distribution (RMD) from a pre-tax retirement account. Whether it's a 401(k), traditional IRA, 403(b), SEP IRA, or SIMPLE IRA, failure to take your RMD on time can lead to a costly mistake.
What Is a Missed RMD?
Once you reach age 73, you're required to take a minimum distribution each year from most pre-tax retirement accounts. This includes:
Traditional IRAs
401(k) and 403(b) plans
SEP and SIMPLE IRAs
If you don’t withdraw the correct RMD amount by the deadline, the IRS imposes an excise tax of 25% on the amount not withdrawn. However, if the mistake is corrected within two years, the penalty may be reduced to 10%, provided the IRS deems your correction timely and reasonable.
When Should You Check for a Missed RMD?
You should verify RMDs annually once the account holder turns 73. Additionally, beneficiaries of inherited IRAs or non-spouse inherited Roth IRAs should also confirm RMD requirements—especially if the original account holder passed away on or after their required beginning date. RMDs may also apply under the 10-year rule for inherited accounts.
Working with a financial advisor to review RMD calculations can help avoid errors and ensure compliance.
Fixing a Missed RMD: Step-by-Step
1. Review the Year-End Balance
Start by determining the prior year’s ending balance of the retirement account for the year the RMD was missed. This value serves as the basis for calculating the missed distribution.
Note: RMDs were waived for tax year 2020 due to the CARES Act.
2. Identify the Correct Life Expectancy Factor
Use the appropriate IRS life expectancy table:
IRA Owners: Use your age in the missed year and refer to the Uniform Lifetime Table.
Non-Spouse Beneficiaries (pre-2020): Use your age in the year after the original owner’s death and reference the Single Life Expectancy Table. Subtract one from the factor for each subsequent year.
Non-Spouse Eligible Designated Beneficiaries (post-2019): Apply the same rule unless subject to the 10-year rule.
Spouse Beneficiaries: Use IRS rules specific to spouses, which differ significantly from those for other beneficiaries.
3. Calculate and Withdraw the Missed Amount
Divide the account balance by the appropriate life expectancy factor for each missed year. Withdraw the total missed RMD amount as soon as possible.
4. File IRS Form 5329 and Request a Waiver
For each year you missed an RMD, file Form 5329 to report the shortfall and excise tax. You can request a waiver of the penalty by attaching a signed letter that includes:
Why the RMD was missed
How the mistake has been corrected
Steps you’ve taken to avoid future issues
The IRS may waive the penalty for reasonable cause, especially if the error is corrected promptly.
5. Prevent It from Happening Again
Avoid future RMD issues by setting up automated withdrawals through your custodian. Many financial institutions offer this feature as part of their retirement services. If you're prone to forgetting, this simple step can eliminate future mistakes and penalties.
Remember: the IRS won’t take the RMD for you—it’s your responsibility to ensure it happens.
Make RMDs Part of Your Retirement Income Strategy
RMDs aren’t just about tax compliance—they should be part of a broader retirement income plan. Ignoring them can disrupt your cash flow and long-term tax strategy.
If you’re unsure how to integrate RMDs into your retirement plan, working with a qualified financial planner can help you optimize income, reduce taxes, and avoid penalties.
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