RMD not taken
We have a client who is intentionally not going to take an RMD this year. They have a very good reason. I explained the 50% penalty tax to them. They understand, but still are not planning to take the RMD. Other than the obvious tax hit, what else happens if someone doesn’t take an RMD? This could possibly go on for a couple years. I assume next year they will get hit with two 50% penalties? What else? Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2022-12-22 01:28
Consequences are unpredictable but still affected by client’s actions. If RMD is not taken, does client intend to pay the penalty or to make up the RMDs? Note that the penalty can be waived for reasonable cause, but intentional omission is not a reasonable cause. Further, the IRS will only waive the penalty after the missed RMDs are taken, and the 5329 filed.
Permalink Submitted by Alan - IRA critic on Thu, 2022-12-22 01:28
Consequences are unpredictable but still affected by client’s actions. If RMD is not taken, does client intend to pay the penalty or to make up the RMDs? Note that the penalty can be waived for reasonable cause, but intentional omission is not a reasonable cause. Further, the IRS will only waive the penalty after the missed RMDs are taken, and the 5329 filed.
Permalink Submitted by Richard Stumpf on Mon, 2022-12-26 15:53
client would have to liquidate a very valuable asset to make the RMD, and client would rather pay the penalty than liquidate the asset. It’s an all or nothing deal, so can’t sell just part of it. But if client has to pay the penalty every year until the RMD is taken, and then they don’t take future years as well, it can get to the place of being very expensive to try and hold the asset as well. So does the penalty tax keep accruing each year if the RMD doesn’t get taken, or do they eventually force a distribution?
Permalink Submitted by Alan - IRA critic on Mon, 2022-12-26 16:22
The penalty is only due for the year the RMD is missed, although late interest can accrue between the time the penalty is due (4/15 of year following the missed RMD) and when it is paid. Of course, the payment would likely not be late in this case since the penalty will not be appealed. Also, note that while the Secure 2.0 provisions reduce the penalty to 25% or even down to 10% if the missed RMD is taken within 2 years, these provisions only apply to RMD years after 2022.
Permalink Submitted by Richard Stumpf on Mon, 2022-12-26 19:38
There is no on-going penalty for not taking RMDs? I skip one, pay one penalty, and it’s done forever? I assumed there would be a recurring annual penalty until you cured the skipped RMD. So you are saying that is not correct? And lowering the penalty in future years would reduce the cost to them of keeping this valuable investment in their account indefinitely?
Permalink Submitted by Alan - IRA critic on Mon, 2022-12-26 20:16
What you describe is the situation for excess contributions, but not missed RMDs. The future year penalty reduction would only apply to future missed RMDs, not to this one for 2022. If the 2022 RMD is not distributed, then the 2023 RMD would be slightly higher than otherwise due to the year end balance being higher by the amount of the 2022 RMD not distributed. The 2023 RMD would incur the lower penalty if not taken by the end of 2023. All the missed RMDs also reduce the amount eligible for rollover in the future, since an RMD is never rollover eligible.
Permalink Submitted by Bruce Steiner on Mon, 2023-01-02 22:42
Can he/she distribute a portion of that asset in kind?