IRA Required Minimum Distribution Not Satisfied: Penalty and Penalty Waiver Request | Wolters Kluwer
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  • IRA Required Minimum Distribution Not Satisfied: Penalty and Penalty Waiver Request

    DianaTheis Onward

    by Diana Theis, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published January 17, 2019



    Overview

    A common question asked at the beginning of a year is, “What should an individual retirement account (IRA) owner or beneficiary do if he/she did not take his/her required minimum distribution (RMD) by the December 31 deadline?” This article provides an answer.

    RMD Deadline

    Traditional, simplified employee pension (SEP), and Savings Incentive Match Plan for Small Employers (SIMPLE) IRA owners are required to take a distribution beginning the year they attain age 70½. An IRA owner has until April 1 of the year after his/her age 70½ year to take his/her first distribution, a date referred to as the required beginning date (RBD). For RMDs after the first year, the deadline is December 31. After the death of an IRA owner, a beneficiary generally must take an RMD annually (by December 31) using the single life expectancy payout method.

    Penalty for Not Taking an RMD Timely

    If an RMD is not withdrawn before the applicable deadline, the IRA owner (or beneficiary) is subject to a 50 percent “excess accumulation” penalty tax on the amount not taken. For example, if an RMD of $4,000 is not taken an excess accumulation penalty tax of $2,000 (i.e., $4,000 x .50 = $2,000) applies. However, if the deadline to satisfy an RMD is missed due to a reasonable cause, an IRA owner (or beneficiary) may ask the Internal Revenue Service (IRS) to waive the penalty. When requesting a waiver of an excess accumulation penalty it is prudent for an IRA owner (or beneficiary) to withdraw the RMD as soon as he/she realizes it was not taken timely. An IRA owner (or beneficiary) may request a waiver of the penalty by writing a letter to the IRS explaining the reason the RMD deadline was missed, and the fact that he/she has remedied the “shortfall” by removing the RMD, though it was done after the deadline. The letter of explanation is attached to IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, without payment for the penalty. An IRA owner (or beneficiary) waits for a reply from the IRS stating whether a penalty is due.

    Example without Reasonable Cause:

    George, age 82 in 2018, had a traditional IRA RMD of $3,200 for 2018. George forgot to take his 2018 RMD by the December 31, 2018 deadline. On January 9, 2019 George withdrew an amount equal to his 2018 RMD. George completes IRS Form 5329 and pays a penalty of $1,600 with his 2018 tax return. Keep in mind, because he removed the 2018 RMD in 2019, the distribution is reported on a 2019 IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as taxable income for 2019.

    Example with Reasonable Cause:

    Brittany, age 75 in 2018 has a traditional IRA RMD of $1,000. She was in a car accident and as a result was unable to withdraw her RMD by the December 31, 2018 deadline. On January 16, 2019 Brittany withdrew her 2018 RMD. Brittany wrote a letter explaining the reason why she was unable to take her RMD timely and indicated that she removed the amount on January 16. She attached the explanation and distribution documentation to IRS Form 5329 that is filed with her 2018 tax return. The distribution is reported on a 2019 IRS Form 1099-R, as taxable income for 2019. The IRS, when considering the circumstances, will make a determination regarding whether the 50 percent penalty will be waived.

    IRA Custodian/Trustee Responsibilities

    IRA custodians/trustees are required to notify IRA owners of their RMDs by providing them with an RMD notice by January 31 each year. The notice informs the IRA owner of the deadline to take the RMD, the amount of the RMD or that the amount will be calculated upon their request and identifies that the RMD status is reported to the IRS. The RMD notice is not required to be provided to a beneficiary.

    The IRA custodian/trustee is not responsible for ensuring that the IRA owner/beneficiary takes his/her RMD before the deadline. However, it is common for an IRA owner to sign a document authorizing automatic period payments of the RMD amount each year. If the IRA custodian/trustee fails to distribute the amount as instructed, the IRS sees this as an IRA owner failing to take the RMD. Therefore, the IRA owner is subject to the penalty, not the IRA custodian/trustee.

    Some IRA custodians/trustees have a policy that states if an IRA owner fails to take an RMD, they will automatically pay out the RMD amount prior to the deadline while other IRA custodians/trustees choose to do nothing at all. Either policy is acceptable.

    Conclusion

    A missed RMD may result in a 50 percent excess accumulation penalty. However, if there is a reasonable cause for the reason an RMD was not taken before the deadline, the IRS might waive the penalty upon request. It is the responsibility of an IRA owner (or beneficiary) to understand the RMD rules and deadlines to avoid a penalty situation. Information regarding the RMD and the penalty can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

    For an opportunity to learn more about IRAs and other tax advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider joining us for one of our IRA, HSA, or CESA Live Streaming events offered on a variety of topics. For more information call us at 1-800-552-9408



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