First, here is a link to a worksheet for calculating your RMD (Required Minimum Distribution). http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf
- What are Required Minimum Distributions?
- What types of retirement plans require minimum distributions?
- When is the deadline for receiving a RMD from an IRA?
- How is the amount of the RMD calculated?
- Can an account owner just take a RMD from one account instead of separately from each account?
- Who calculates the amount of the RMD?
- Can an account owner withdraw more than the RMD?
- What happens if a person does not take a RMD by the required deadline?
- Can the penalty for not taking the full RMD be waived?
- Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
- How are RMDs taxed?
- Can RMD amounts be rolled over into another tax-deferred account?
One of the highest penalties imposed by the Internal Revenue Code usually applies to the elderly.
If an individual fails to take out the Required Minimum Distribution (RMD) from a retirement plan, there is a 50 percent penalty on the shortfall. The penalty applies to IRA owners and qualified-plan participants who have reached the required beginning date. It also applies to owners of IRC Sec. 403(b) annuities and beneficiaries of qualified plans, IRAs and Roth IRAs.
The Penalizing Details
So how does the IRS administer this penalty? Until 2003, it had very little information about individuals who might be subject to the penalty. Today, IRA custodians report to the IRS the identity of those required to take RMDs. The RMD amount, however, is not reported, and there is no reporting of those required to take distributions as beneficiaries or as participants in qualified plans or IRC Sec. 403 arrangements.
The penalty is reported on Form 5329, which triggers the statute of limitations on penalties. If a taxpayer wants the IRS to waive the penalty, the waiver request must accompany Form 5329.
If it looks like a taxpayer has failed to receive the RMD, there are a number of steps to be taken.
First, recalculate the amount to be withdrawn. Taxpayers with a number of IRAs calculate the RMD for each account, add them and withdraw the amount from any of the IRAs. There is no requirement that distributions be taken pro rata from the IRAs. Similarly, if taxpayers have more than one IRC Sec. 403(b) arrangement, they calculate the RMDs separately, but can withdraw the RMD from any account.
The rules are more complicated if RMDs are due from qualified plans. In these cases, the RMD must be taken from each plan—there’s no combining with other qualified plans and no commingling with IRA or IRC Sec. 403(b) RMDs.
The missed amount is often less than the amount of withdrawal that the taxpayer intended, which is why refiguring the amount is important. When you know the absolute minimum that has not been withdrawn, proceed to step two: subtract the amount actually withdrawn from the minimum you calculated. This is the amount to which the 50 percent penalty applies.
Once you know the potential penalty amount, you can proceed to the third step, deciding whether to pay the penalty and leave the missed withdrawal in the plan, or withdraw the missed amount and request a waiver of the 50 percent penalty. In almost every case, taxpayers choose to request a waiver of the penalty.
The Waiver Process
The IRS cannot waive the penalty unless the missed amount has been withdrawn from the plan. The withdrawn amount is taxed in the year received so there will be two payments subject to tax. The taxpayer cannot report the income in the prior year as if it were taken timely and avoid the penalty.
As stated, the penalty waiver is attached to Form 5329. Do not include a tax payment for the penalty—that is no longer a requirement. If Form 5329 and the waiver are submitted on a timely filed tax return, the taxpayer is unlikely to hear whether the waiver has been granted. In this case, no news is good news. Either the waiver has been granted or the IRS has missed the form and the statute of limitations on assessing the penalty has begun.
If the return has been filed without Form 5329, it can be filed separately. In such a case, the taxpayer and paid preparer sign the form just as if it were a separate tax return. Although the form can be sent to the general IRS address, it’s likely to get lost in the shuffle or cause a penalty notice to be mailed. It is best to send the form to the person who grants or denies the waivers. Fresno filers should send the stand alone Form 5329 to the proper area by using this address: Internal Revenue Service; Attention: Customer Accounts Service (CAS); 5045 E. Butler Ave. Stop C2001; Fresno, CA 93727.
The waiver request should explain what happened, reveal that the missed RMD has been taken and ask that the 50 percent penalty be waived. Typical reasons that the RMD was missed:
- The custodian did not process the request in time.
- The request was lost in the mail.
- The taxpayer is elderly and was ill during the year that the RMD was due.
- The taxpayer’s spouse usually handled this and he/she was ill or passed away.