What to Do If You Miss the RMD Deadline

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If you have put your hard-earned money in an individual retirement account (IRA) or any retirement account, then you know that you can’t leave it there forever. So, if you are 73 or older in 2023, you need to take out a minimum distribution each year, called a required minimum distribution (RMD).

In case you fail to take out the RMD on time and the right amount, you could face a penalty of as much as 50%. However, you have a few options that could help you reduce or completely waive the penalty. In this article, we will discuss the steps to take if you miss the RMD deadline or what to do if you miss the RMD deadline.

Before we detail what to do if you miss the RMD deadline, you need to understand what the RMD is.

Who Needs To Take RMD And When?

Traditional IRA accounts are not the only accounts that qualify for the RMD. Any retiree aged 73 or older, who holds funds in employer-sponsored plans, including 401(k)s or 403(b)s, also needs to take the RMDs.

Moreover, RMDs are not just for those who reach age 73. Rather, non-spouse beneficiaries of a traditional IRA or Roth IRA may also be required to take RMDs depending on when the original account holder passed away. You can visit the IRS website for more details on this.

The IRS determines the RMD amount by dividing the total balance of the IRA accounts by the life expectancy. For instance, the IRS pegs the life expectancy of someone aged 72 presently at 27.4 more years.

So, if you are 72 and have $200,000 across your IRA accounts, then the RMD will be $200,000 divided by 27.4, or about $7,300. If you miss the RMD deadline, then you could end up paying 50% of the amount that should have been distributed, or about $3,650 in penalty taxes.

As for when you are required to take the RMDs, the due date of the first RMD is April 1, while subsequent RMDs are due by December 31. However, you must be clear on the year when your first RMD is due.

Starting in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs to age 73. So, if you turn 72 in 2023, then your first RMD will be due on April 1, 2025.

But if you turned 73 in 2023, which means you were 72 in 2022, you were subject to the age 72 RMD rule in effect for 2022. Under this rule, your first RMD was due by April 1, 2023, and the second will be due by Dec. 31, 2023.

Now that you have a good idea of RMDs, let’s discuss what you need to do if you miss the RMD deadline.

What To Do If You Miss The RMD Deadline

Retirees have the following options if they miss the RMD deadline:

Correct The Mistake As Soon As Possible

The very first thing that you need to do once you realize that you missed the RMD deadline is to fix the mistake as soon as possible. You should immediately make the appropriate withdrawal. If you are quick to correct the mistake, the penalty could be reduced from 50% to 25%.

Pay The Penalty

Retirees can visit the IRS website to calculate the penalty (or excise tax) they need to pay for failing to take an RMD. Moreover, retirees need to report the excise tax owed on IRS Form 5329 and IRS Form 1040.

Those who are required to file tax returns with IRS Form 1040 should include the excise tax owed on the form. Those who aren’t required to file tax returns with IRS Form 1040 need to complete Form 5329 and pay the excise tax owed.

You need to enclose the check or money order made payable to the United States Treasury. Don’t forget to write your Social Security number, the current tax year, and “Form 5329” on the check or money order.

Request For A Waiver

Retirees who have a valid reason for missing the RMD deadline can request a waiver from the IRS. They need to include a letter of explanation with their Form 1040 or Form 5329, outlining why they should be granted a waiver and what steps they took to fix the mistake.

There are no clear guidelines on what constitutes a valid reason for a waiver, but some circumstances that are typically accepted include a natural disaster, a death in the family, an illness, or an explainable technical glitch. The IRS will notify the retiree if their waiver request is accepted or denied.

 “Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall,” the IRS says.

If you are requesting a waiver of the penalty for missing the RMD deadline, you should not pay the penalty upfront. Instead, you should follow the specific instructions outlined in the Instructions section of Form 5329. The IRS will then review your request and notify you if it has been accepted or denied. If your request is denied, you will still need to pay the penalty.

Withdraw The Full Balance

Inherited IRA beneficiaries, also known as non-spouse beneficiaries, have their own set of RMD rules to follow. If the original account holder passed away before the start of their RMDs, then the beneficiary is required to take RMDs based on their life expectancy.

The deadline for the first RMD is December 31 of the year following the year of the original account holder’s death. For subsequent RMDs, the deadline is also December 31 of each year. Failure to take the RMDs can result in penalties similar to those for traditional IRA account holders.

Beneficiaries can avoid the RMD excise penalty by taking advantage of the ten-year rule. This rule allows them to withdraw the entire balance of the inherited retirement account by December 31 of the tenth year following the year when the original owner died.

They can take out any amount they want at any time during those ten years, as long as the full balance is withdrawn by the deadline. However, it’s worth noting that if the original account owner died before reaching the RMD age, the beneficiary must still start taking RMDs under the five-year rule.

Final Words

To avoid missing the RMD deadline, setting up automatic withdrawals with your custodian is a great option. You can also calculate your RMD amount well in advance to ensure that the distribution from your account is correct.

If you have multiple retirement accounts, it is important to calculate and withdraw the RMD from each account separately. Additionally, keeping accurate and organized records of your retirement accounts and distributions can help avoid errors or penalties.