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How to Avoid the 50% Excess Tax for RMD failures-Quick and Dirty

Last Updated November 20, 2014

A Quick and Dirty IRA Tip on How to Avoid the 50% Excess Tax for RMD failures

Owners of IRAs and employer sponsored retirement plans(employer plans) must take required minimum distributions (RMD)s  from their retirement accounts, or be subject to a 50% excise tax (excess accumulation penalty).  Some beneficiaries may also need to take RMDs.

The following is a summary of these rules for retirement account owners:

The RMD rules apply to owners of Traditional IRAs, SEP IRAs, SIMPLE IRAs and employer plans.

The RMD rules do not apply to Roth IRA owners.

  • Any retirement account owner who is at least age 70½ by the end of this year, must take an RMD for this year, unless an exception applies. The exceptions are:
    • For amounts in an employer plan, the starting of RMDs can be deferred past age 70½ until retirement, but only if such a deferral is permitted under the employer plan.
    • An employer plan cannot offer such a deferral option to anyone who is a 5% owner of the business
    • Only individuals who are still employed by the employer that provides the employer plan are eligible for this option.
  • For retirement account owners who just reached age 70 ½ this year, the RMD for this year can be taken as late as April 1 of next year.  All other RMDs must be taken by December 31 of the year for which they are due.
  • For employer plans that allow the deferral of RMDs past age 70 ½ until retirement, the RMD for the year of retirement must be taken by April 1 of the year following the year of retirement. All other RMDs must be taken by December 31 of the year for which they are due.

RMD amounts that are not withdrawn by the applicable deadline are subject to an excess accumulation tax of 50% of the RMD shortfall.

The following is a summary of the RMD rules for beneficiaries:

The RMD rules apply to Inherited Traditional IRAs, Inherited SEP IRAs, Inherited SIMPLE IRAs, Inherited Roth IRAs, and Inherited employer plans.

  • If the beneficiary is subject to the five year rule, an RMD is due only for the 5th year that follows the year in which the retirement account owner dies/died. That RMD is the entire account balance
  • If the beneficiary is subject to the life-expectancy rule, an RMD is due for each year, following the year in which the retirement account owner dies/died

RMD amounts that are not withdrawn by the applicable deadline are subject to an excess accumulation tax of 50% of the RMD shortfall.

Avoiding the Excise Tax

For those who miss the RMD deadline, the IRS will waive the penalty, if the failure to withdraw the RMD by the deadline is due to ‘reasonable cause’.

The excess accumulation penalty is paid to the IRS

A waiver of the penalty can be requested by filing IRS Form 5329

Please share this information with someone who you think may need to take an RMD.

RMD and beneficiary calculator at http://www.72t.net/ for consumers

RMD and beneficiary calculator at www.Brentmark.com for professionals

  – an Appleby IRA Tip