If you are over age 70 ½, the IRS requires you to take a required minimum distribution known as an RMD from your IRA each year. As long as your IRA RMD is completed by December 31st, you are in good shape. However, if you fail to meet your RMD by the deadline, the penalty is steep – 50% of the RMD amount. If your IRA RMD is $10,000, that means a $5,000 penalty on top of the tax you already owe.
It’s not hard to miss an IRA RMD. Maybe you had more than one IRA account and didn’t take them all into consideration when calculating your RMD amount. Or perhaps you inherited an IRA and didn’t realize that you have an RMD on that IRA even though you are under age 70 ½. Maybe with all the other things you have going on in your life, you simply missed the deadline, an honest mistake. It happens.
If it happened to you, here is what you need to do:
1st Double check your RMD calculation to be sure it’s accurate. The RMD is based on the total balance of all your IRAs as of December 31st of the previous year. If you missed your 2014 IRA RMD, the calculation is based on your 2013 year-end balance. Be sure to include 401(k) and other retirement plan balances if you are no longer working for that employer. Since Roth IRAs don’t have an RMD requirement, do not include them in your calculation. Inherited IRAs don’t go into this calculation either. They are calculated differently and separately.
2nd Contact your IRA custodian to take your late RMD ASAP. Do this right away. I would also recommend doing this as a separate transaction rather than combining it with the RMD that is due for the current year. That way, the accounting is easier to keep track of. The sooner you take your late RMD, the better your chances of having the IRS waive your penalty.
3rd Complete IRS form 5329. This is the form that needs to be submitted with your late RMD payment. In particular you will want to complete section VIII, lines 50-53. You can download form 5329 here.
4th Submit IRS form 5329 along with your tax payment. Obviously when you take your RMD, you will need to pay the tax due.
5th Ask for leniency. Completing these steps won’t guarantee that the IRS will waive the 50% penalty. Along with your 5329 form, include a brief note explaining why you failed to meet your RMD on time. Be sure to mention and include documentation that you have contacted your IRA custodian to take your late RMD.
If you work with a tax professional, be sure to tell them about your missed IRA RMD right away. As a double check, I would also ask them to review your IRA RMD calculation and your 5329 form before you send it in to the IRS.
Following these steps won’t guarantee that the IRS will waive your penalty, but if you take action right away, follow the steps above, and consult your tax professional your chance are good.
By the way, if you missed your IRA RMD or calculated it incorrectly, and you do not work with a tax or other appropriately qualified financial professional, maybe you should. Who knows what else you might be missing.
If I can help, just Ask Mike.
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