Did you forget your RMD this Year? All may not be Lost

Did you forget your RMD this Year? All may not be Lost

One of the Planner’s asked me an interesting question the other day,

What can we do when someone doesn’t take their Required Minimum Distribution?

What are Required Minimum Distributions?

Before we get into my research, lets start with the question, what are RMDs? Like I have said in the past, when you have a question like this go to the source, the IRS, which define RMDs as,

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.

When do you have to start taking your Required Minimum Distribution?

An account owner must take the first RMD for the year in which he or she turns 70 ½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70 ½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

While I doubt that any of my daily readers are 70+ but I’d love to hear if you are! Most likely it is a boomer’s parent or fellow late 20 year old’s grandparent.  So pass along the info!  IT SHOULD BE NOTED THAT RMDs ARE SUSPENDED FOR 2009 (Full Article HERE) BUT NOT FOR 2008! For this particular post it is irrelevant how to calculate the dollar amount.

In this Planner’s case, there were problems with bad drafting by an attorney 10 years ago with a trust not meant to be the beneficiary of a qualifed account (More information about protecting qualified Accounts with Trusts CORRECTLY) and a deceased husband leaving a confused Widow and an angry daughter.

What happens if a person does not take a RMD by the required deadline?

So with a little research on the IRS’ website I was able to provide the following printout:

If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

Can the penalty for not taking the full RMD be waived?

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. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.

Want more information? Check out Publication 590 and Form 5329 and Instructions thereto.

Leave a reply


+ 1 = 10