What Is an RMD?
A Required Minimum Distribution (RMD) is the minimum amount that individuals must withdraw annually from their pre-tax retirement accounts—such as traditional IRAs, 401(k)s, and 403(b)s—once they reach a certain age. The IRS requires these withdrawals to ensure taxes are paid on tax-deferred savings. Roth IRAs are exempt from RMDs during the original owner's lifetime since the contributions are already taxed.
RMDs generally begin at age 72 for individuals who turn 70½ after Dec. 31, 2019. If you reached 70½ before that date, you started taking RMDs at that age. RMDs must be taken by Dec. 31 each year, and the amount can be calculated using the IRS RMD table.
You can delay your first RMD until April 1 of the year after you turn 72. After that, all subsequent RMDs must be taken by Dec. 31 each year. It's crucial for retirees to understand and follow RMD rules to avoid penalties.
Designated beneficiaries must take RMDs based on their own calculations, while non-designated beneficiaries are required to withdraw all funds within 10 years. However, minor non-designated beneficiaries are exempt from this rule until they reach adulthood.
What Happens If You Miss Your RMD
If you miss your Required Minimum Distribution (RMD), the IRS imposes a penalty for the shortfall. Under current law, the penalty is 50% of the amount not withdrawn. This means if you were supposed to take an RMD of $5,000 and missed it, you could face a penalty of $2,500 (50% of $5,000).
However, if you miss an RMD, you can generally correct the mistake by withdrawing the missed amount as soon as possible. You would need to file Form 5329 to request a penalty waiver, explaining the reason for the error. In some cases, the IRS may waive the penalty, particularly if the shortfall was due to reasonable cause (e.g., a serious illness or other extenuating circumstances), but this is not guaranteed.
Steps to Take If You’ve Missed Your RMD
If you miss your Required Minimum Distribution (RMD), here are the key steps you should take to correct the mistake and minimize penalties:
- Take the Missed RMD ASAP
- Withdraw the missed amount as soon as possible. The IRS expects the distribution to be taken in the year it was due, so the sooner you make the withdrawal, the better. Even if it's after the deadline, taking the RMD quickly can help show that you are trying to fix the issue.
- Calculate the Correct Amount
- Ensure you're withdrawing the correct amount based on the IRS RMD table. You can use your financial statements, the IRS RMD worksheet, or consult with a financial advisor to determine how much you should have withdrawn.
- File IRS Form 5329
- Complete IRS Form 5329 to report the missed RMD. Remember, the form has a specific version for each year, so filling out the form for the matching year is essential. This form is specifically for situations like this and helps you request a penalty waiver. The IRS website has forms for 1975 and onward.
- Part IX
- Line 52: Enter the RMD amount for each account where you missed the distribution.
- Line 53: Enter the amount you withdrew. This could be $0 if you haven’t made a withdrawal yet.
- Line 54: Write "0" on this line. Then, to the left of the line, write "RC" (for reasonable cause) and the amount of the RMD shortfall. For example, if your RMD was $20,000 but you only withdrew $5,000, the shortfall would be $15,000.
- Line 55: Enter "0" if you’re requesting a penalty waiver. Note that you don’t have to pay the penalty upfront.
- Once the form is completed, mail it along with your penalty waiver letter to the IRS.
- Also, do not file Form 1040-X to amend your taxes for the missed RMD. You’ll only owe taxes on the amount withdrawn to satisfy the RMD in the year your plan administrator made the distribution.
- Request a Penalty Waiver
- Provide an explanation of why you missed the RMD, if appropriate. If the cause was reasonable (such as a medical issue or error in your financial records), you can ask the IRS to waive the 50% penalty.
- Attach any supporting documentation (e.g., medical records, proof of administrative error) that explains why you missed the RMD.
- Keep Records
- Document everything related to the missed RMD, including the amount you withdrew, when it was withdrawn, and any correspondence with the IRS. This is important in case the IRS questions your actions.
- Take Preventative Measures
- Set up automatic withdrawals for future RMDs to avoid missing them again.
- Consult a financial advisor to ensure you’re properly tracking and taking your RMDs.
- Monitor IRS Response
- If the IRS accepts your waiver request, they may reduce or eliminate the penalty. If not, they will send a notice explaining the penalty and how to proceed.
Taking quick corrective action and filing the necessary forms is critical to minimize the financial impact of missing an RMD.
RMD Penalty Waiver Letter Sample
To Whom It May Concern,
I am writing to inform you of a shortfall in my Required Minimum Distributions (RMDs) for the tax year(s) [list tax years for missed RMDs]. Upon reviewing my financial records on [date of discovery], I realized that my distributions were insufficient. The shortfalls for each year are as follows:
- [Tax Year A]: [Shortfall amount]
- [Tax Year B]: [Shortfall amount]
- [Etc.]
I was unaware of this issue at the time due to [brief explanation of the reason, e.g., illness or personal hardship]. Upon discovery, I took corrective action by making the necessary distributions on [specific dates], as shown in the attached documentation.
As shown in my tax history, I have always made an effort to comply with all IRS regulations. To prevent future errors, I have [briefly list corrective steps, such as working with a financial advisor or automating distributions]. I respectfully request a waiver of penalties for the RMD shortfalls for the years [insert relevant years], and I have included Form 5329 and a report from my physician.
Thank you for your consideration.
Sincerely,
[Your Signature]
[Your Name]
