Did You Miss an RMD in 2014? 3 Steps to Fix This

Friday, January 16, 2015

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

We spent the early part of the week looking at both sides of when you should take your RMD (early or late in the year). However, if you waited until the end of the year and then missed taking your RMD (required minimum distribution), here’s how to correct it.

  1. DO NOT IGNORE THE MISSED RMD. That will only make the problem worse. Take a distribution of the missed amount as soon as you realize that you did not meet the RMD requirement for the year. It does not matter if the fault was yours, or the financial institution’s, or your advisor’s. But this is only the first step.
     
  2. Next you have to report the missed distribution to IRS. There is a penalty of 50% (that is NOT a typo) of the amount that is missed. You must report this on IRS Form 5329, which can be filed with your tax return for the year or as a stand-alone return. The IRS has the authority to waive the penalty – for good cause. If you are requesting a waiver of the penalty, it is very important that you end up with zero on the last line of this form. The instructions are very confusing, but if you have a number on the last line of the return it will carry over to your income tax return and IRS will expect to be paid the amount shown on the last line of Form 5329.
     
  3. If you are requesting a waiver, attach a note to the Form 5329. Keep it simple. Explain what happened, that you corrected the error as soon as you discovered it, and tell IRS that it will not happen again (you can include the steps you have taken to ensure this). You should hear from IRS within a few months letting you know if they have agreed to waive the penalty or not.

Why should you do all of this? For one simple reason – the statute of limitations. Form 5329 is a stand-alone return according to the Tax Court. When you don’t file a return, the statute of limitations does not start to run. IRS can come back to you at any time and assess the 50% penalty, plus failure to file penalties, plus accuracy related penalties, and interest on all the penalties. This is why you don’t want to ignore a missed distribution.

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