by Denise Appleby, CISP, CRC, CRPS, CRSP, APA
Every year, retirement account owners and beneficiaries miss the deadline for taking their required minimum distribution (RMD). As a result these individuals owe an excess accumulation penalty of 50% of their RMD shortfall to the IRS. The bad news is that this penalty can represent a large sum for individuals who need to take large RMD amounts. The good news is that the penalty can be waived if the right steps are taken. For common reasons why individuals miss deadlines for taking their RMD amounts, see Common Reasons Why RMD Deadlines are Missed.
- For retirement owners who reach age 70 ½ during the year, the deadline for taking the RMD for that year is April 1 of the following year. For instance, if the individual reached age 70 ½ in 2010, the deadline for taking the 2010 RMD is April 1, 2011. All subsequent RMDs must be withdrawn by December 31 of the year to which the RMD applies.
- For retirement account owners who are older than age 70 ½ and have assets in a retirement plan that allows them to defer beginning their RMD until they retire; their first RMD for those assets is due by April 1 of the year following the year that they retire. This option can apply only to qualified plans, 403(b) plans and 457(b) plans, and cannot be made available to individuals who own more than five percent of the business that sponsors the plan ( 5% owners). This five percent rule does not apply to 403(b) plans.
- The beneficiary is subject to the life expectancy rule and the retirement account owner died before the current year. In such cases, the beneficiary-RMD must be withdrawn from the account by the end of the year. For instance, if the retirement account owned died in 2010, the beneficiary-RMD for 2011 must be withdrawn by December 31, 2011.
- The beneficiary is subject to the five year rule and the five year period expired at the end of the year. Under the five year rule, distributions are optional until the end of the fifth year, at which time the entire balance must be withdrawn from the account. For instance, if the retirement account owner died in 2005, distributions are optional until December 31, 2011 at which time the entire account balance must be withdrawn. ( extended for one year because RMDs were waived for 2009)
- Pay the IRS the penalty. This is calculated on IRS Form 5329 (under the section labeled “Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs)” and reported in the ‘other taxes’ section of the individual’s tax return (Form 1040). Important note: You cannot file Form 1040A or 1040EZ if your file Firm 5329. Instead, you must file Form 1040). Forms 5329 and 1040 are available at www.irs.gov.
- Ask the IRS to waive the penalty. The IRS can waive the penalty, if the owner or beneficiary can show ‘reasonable cause’ for not taking the RMD or demonstrate that the shortfall was due to ‘reasonable error’. Individuals who feel that they qualify for a waiver should File Form 5329 and attach a letter of explanation to the IRS. The letter should explain why the RMD deadline was missed, or why less than the RMD amount was withdrawn. The individual must also show that have steps have been taken to remedy the RMD short fall- such as including a copy of the account statement showing that the RMD has since been taken from the account. An individual who applies for the waiver should not pay the penalty unless the IRS informs him or her that the waiver-request was denied.
- The individual is the sole primary beneficiary of the account and is subject to the life expectancy rule
- The retirement account owner died before the required beginning date (RBD) , and
- The individual switched to the five year rule, by withdrawing the entire balance by the end of the fifth year.