Avoiding the 50% Penalty on Overlooked RMDs
You're busy enjoying retirement and you just plain forget to take your required minimum distribution. Or you do the math wrong. It could be a costly mistake. Here's how to fix it.
![](https://cdn.mos.cms.futurecdn.net/aazdfPD7jxzvrrYcuYEp89-415-80.jpg)
There’s no denying the tax benefits of funding a retirement account, one of which is the compound effect of tax-deferred growth. But your money can’t avoid the IRS forever.
That’s why owners and beneficiaries of traditional IRAs, SEP and SIMPLE IRAs, 401(k)s and 403(b) accounts must meet the deadline for taking their required minimum distributions (RMD), which kick in once they reach the age of 70½.
Where People Go Wrong
All too often, owners of these plans make a costly mistake: They either end up miscalculating their RMD, or they take it from the wrong type of account. For example they may erroneously take a distribution from the other spouse's IRA.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There's more than a good chance that some retirement account owners will fail to properly take all of their required distributions. When an RMD is not correctly taken, any shortfall is subject to a 50% penalty. To put that in dollar figures, if you had an IRA worth $200,000 and you were 72 years old, your RMD would be approximately $7,813. If you somehow missed taking that required distribution you could owe the IRS a penalty of $3,907.
How to Fix Your Error
However, if you catch your mistake sooner rather than later and promptly take the proper action, this is one penalty you can usually avoid. The IRS has the authority to waive the 50% RMD penalty when the shortfall is due to a reasonable error.
Step 1
The first thing you should do after discovering your RMD was missed or you didn’t take the right amount is to take immediate corrective action. Calculate the shortfall and then remove that amount as soon as possible from the IRA. (For help on how to do the math, try an RMD calculator.)
Step 2
Next, file tax form 5329, "Additional Taxes on Qualified Plans (Including IRAs) And Other Tax Favored Accounts." This form can be filed with your tax return or by itself. As long as you're requesting that the 50% penalty be waived, payment does not have to be made when the forms are filed.
Step 3
Along with the form 5329, you should attach a letter explaining the shortfall and the steps taken to rectify the error.
In addition, provide an explanation as to why you made the mistake in the first place. While there's no formal guidance on what a "reasonable error" is, some potential explanations that might pass IRS scrutiny include: illness, a death in the family, a change in address that disrupted essential communication regarding the RMD, or that you relied upon incorrect professional advice.
While there's no guarantee, if you follow these steps, there’s a good chance the IRS will waive the penalty. If so, you can expect to receive a notice from the IRS a few months after submitting the form 5329 confirming that they have waived the penalty. It’s a good idea to save this notice.
To Avoid Problems in the Future
Missing your RMD can be frustrating and costly. To ensure it does not happen again, take the necessary steps to make sure the correct distribution occurs by the applicable deadline.
This includes making arrangements with your custodian for systematic or automatic withdrawals to occur on a predetermined date. Submit your withdrawal request at least two months before the deadline, and check your statements to ensure the correct amount was distributed from your account.
Submitting your requests early allows sufficient time for any necessary adjustments. Finally, talk to your financial institution about other ways it can help you satisfy your RMD requirements.
Good luck, and next year at a minimum, be sure to double-check your required minimum distribution calculations.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published