How do I fix a missed RMD?

In 2018, the first baby boomer turned 73, the age at which required minimum distri­b­u­tions (RMDs) begin. Since then, an estimated 480,000 more have crossed that threshold, with another 120,000 approaching the deadline next spring. It’s an important deadline for those holding invest­ments in tradi­tional IRAs. Failure to take RMDs on time could result in a 25% tax penalty on the amount of money required to be withdrawn.

Who’s required to take RMDs?

As previ­ously stated, RMDs begin at age 73 for tradi­tional IRAs.

However, tradi­tional IRAs are not the only types of accounts with RMDs. Anyone reaching age 73 who holds funds in employer-sponsored plans, such as 401(k)s or 403(b)s, must also take RMDs (unless they qualify for the still-working exemption).

It’s also important to under­stand that RMDs aren’t just for those reaching age 73. Depending on when the original account holder passed, non-spouse benefi­ciaries may be subject to taking RMDs.

If the account owner died on or before December 31, 2019, RMDs begin by December 31 of the year after the year the owner died. The ruling is a bit different if the account owner died after December 31, 2019. Non-spouse benefi­ciaries have until December 31 of the tenth year after the year the owner died to empty the account, in addition to distri­b­u­tions for each of the 10 years. Be sure to check if the deceased owner was subject to RMD require­ments, and if so, whether they took RMDs before the IRA converted to a benefi­ciary IRA.

If this sounds compli­cated, that’s because it is. RMD rules can be highly complex, and it’s easy to make mistakes by taking the wrong RMD amount, taking an RMD from the wrong account, or missing an RMD altogether.

Fortu­nately, the IRS recog­nizes how compli­cated RMD rules can be. It is willing to waive the penalty when the mistake is reasonable and the taxpayer takes reasonable steps to correct it.

So, how can I make a missed RMD right?

If you’ve missed an RMD, here’s how to correct the error.

1. Take the RMD when you discover you have missed it. It’s best to take it as a separate distri­b­ution (not comingled with the current year).

2. After taking the RMD, file Form 5329 for each year an RMD was missed. Note that the form should be the version for that year (e.g., reporting a missed RMD for the tax year 2022 should be done on a 2022 Form 5329). The IRS website contains downloadable versions of Form 5329 going back to 1975.

How to complete Form 5329 (2024)²

Lines 52a and/or 52b: Minimum required distri­b­ution
On this line, indicate the total amount of the RMD. Only include the total for the accounts that had a shortfall.

Lines 53a and/or 53b: Amount distributed
List the amount that was taken. If nothing was taken, enter zero.

Line 54: Subtract line 53a and/or 53b from line 52a and/or 52b
For RMDs missed less than two years ago, record your value on line 54a. For RMDs missed more than two years ago, record your value on line 54b. If seeking a waiver for reasonable cause, write “RC” on the dotted lines next to steps 54a and/or 54b, followed by the amount you seek a waiver for. If only a partial waiver, subtract this amount from the total shortfall and enter the result on lines 54a and/or 54b.

Line 55: Additional tax. Enter the applicable percentage on line 54
When seeking a penalty waiver, this line will also be zero. Even if the taxpayer does not receive a waiver, they are not required to pay the penalty in advance.²

3. Repeat this procedure for each tax year an RMD shortfall occurred, using Form 5329 for that specific year.

4. Write a letter stating your case for why the IRS should waive the penalty. The letter should be brief and cover the following points:

• The reason the RMD was missed
• The fact that the RMD has now been taken
• The steps you’ve taken to ensure future RMDs are made on time

5. Mail the completed form to the IRS as a stand­alone form, along with your letter of expla­nation. Be sure to sign the form.

Note: You do not need to file a 1040X to amend your taxes for the year the RMD was supposed to be taken. Tax on the amount taken to correct the missed RMD will be due in the year the funds are distributed.

Some taxpayers do not think they need to correct missed RMDs going back further than three years. This miscon­ception comes from the IRS website regarding audits:

“Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don’t go back more than the last six years.”¹

The key word here is “generally.” The IRS can audit the most recent three years for any reason. It can go back six years if there is a “substantial under­statement of income,” defined as under­stating tax liability by 10% or $5,000, whichever is greater. But there is no statute of limita­tions in the event of fraud.

When you find an RMD error, the wise course of action is to fix it promptly and file Form 5329 to seek relief from the penalty. The IRS generally grants relief when errors are self-reported and rectified promptly.

Insights:

• Failure to take RMDs on time results in a 25% tax penalty, but if corrected within two years, the penalty is only 10%.
• Taxpayers often make mistakes by taking the wrong RMD amount, taking an RMD from the wrong account (or the wrong type of account), or missing an RMD completely.
• The IRS can waive penalties for missed RMDs when they are self-reported and rectified promptly using Form 5329.

Origi­nally Posted October 17, 2019