The RMD Penalty Hit

If you're at least 73 years old and have a traditional tax-advantaged retirement account, the Internal Revenue Service (IRS) requires that you withdraw a minimum amount of money every year and pay the taxes owed on the money.

This required minimum distribution (RMD) is necessary if you have a traditional individual retirement account (IRA), a SEP IRA, a SIMPLE IRA, a company-sponsored 401(k) account, or a 403(b) account. Withdrawals are not required f✱or money in a Roth account rather than a traditional account.

There are serious consequences for failing to take the required minim🐻um distribution (RMD): A penalty of 25% of the amount that should have been withdrawn plus any income taxes owed on that amount.

The penalty ma♍y be reduced to 10✃% or waived entirely if you take prompt action.

Note: A "traditional" account contains money that was not taxed at the time it was paid into the account. The alternative, a Roth account, contains money that was taxed at the time it was paid in and, therefore, no further taxes are owed. All are "tax-advantaged" accounts because the IRS gives their owners a tax break to encourage them to save money for retirement.

How the RMD Penalty Works

The purpose of the RMD is clear: The gov🌄ernment has deferred taxes on some of your income for many years, and now it wants some of that money.

The amount you owe is determined by your age. You must withdraw money the year you reach 73 and every year thereafter. The IRS supplies worksheets to determine how much you must withdraw for the year.

If you fail to withdraw the RMD by the applicable deadline, the IRS can charge you a penalty of 25% of the amount you🅷 should have withdrawn, plus the income taxes that would be due on that amount.

You wi🍌ll, of course, owe the income taxes i☂f you withdraw the money on schedule.

However, if the failure is "timely corrected within two years," according to the IRS, the penalty is reduced from 25% to 10%. In some cases, the penalty may be waived.

Here are the steps you should take if you're facing a possible RMD penalty.

Step 1: Request a Waiver

If you feel that you missed the deadline due to a reasonable error, you may ask the IRS to waive the 25% excise tax by filing IRS Form 5329 and attaching a letter of explanation for the waiver.

When requesting a waiver, do not pay the excise tax immediately. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, you will be notified.

Step 2: Pay the Excise Tax

If you don't qualify for a waiver, you must pay the excise tax. The amount owed must be calculated and reported on IRS Form 5329 and 澳洲幸运5官方开奖结果体彩网:IRS Form 1040 and filed with your federal tax return for the yea𝕴r in which the RMD shortfall occurred.

If you are not required to file your taxes with IRS Form 1040, you may file Form 5329 by itself and pay the excise tax owed. The IRS website offers instructions for Form 5329. (Only people whose income is less than the standard deduction don't need to file a Form 1040.)

Complete the form with the requested information, and enclose your check or money order made payable to the United States Treasury. On the check or money order, write your Social Security number, the current tax year, and “Form 5329.” (Check the IRS website for other payment options.)

Step 3: If You Inherited the Account

People who inherit retirement accounts must take RMDs, following IRS rules based on the type of 澳洲幸运5官方开奖结果体彩网:beneficiary. Beneficiaries are also subject to the 25% excise tax if they miss their RMD deadline.

If you are a 澳洲幸运5官方开奖结果体彩网:designated beneficiary who inherited a retirement account from an owner who died in 2019 or earlier, and the person's death occurred before their 澳洲幸运5官方开奖结果体彩网:required beginning date (RBD), you are required to take annual beneficiary RMDs over your 澳洲幸运5官方开奖结果体彩网:life expectancy, starting the year after the owner’s death.

There is one instance in which a beneficiary can get an automatic 𒆙waiver of the excise tax. Some beneficiaries (w🌃ho are not surviving spouses or dependents of the deceased) might be subject to the five-year rule instead.

Under the five-year rule, you don't need to take distributions for the first four years but you must withdraw the entire balance by the end of the fifth year.

The five-year rule was increased to 10 years under provisions of the 澳洲幸运5官方开奖结果体彩网:SECURE Act of 2019. Most SECURE Act provisions have since expired. IRS FAQs updated on Dec. 10, 2024, indicate that the five-year rule now applies.

If you are uncertain which rules apply to you, ch☂eck with your IRA custodian or plan trustee.

How to Use the 5-Year Rule

While the excise penalty will generally apply if you do not withdraw the RMD amount on time, the penalty may be waived if you switch from the life expectancy rule to the five-year rule and withdraw the full balance of the account by Dec. 31 of the fifth year following the year when the retirement account owner died.

Let’s look at the following example:

In 2018, John, age 63, inheriteꦇd an IRA from his husband Ron, who died at🌃 age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:

1. John can distribute the assets over his own life expectancy. For most IRA plan documents, this is the default option and is consistent with the provisions of RMD regulations.
2. John can distribute the assets by December 31 of the fifth year following the year when Ron died.

John choos✅es the life-expectancy option. The RMD for 2019 is $10,000, but John fails to withdraw any amount by December 31, 2019. If John wants to continue using the life-expectancy method, then he will have to pay the IRS an excise tax of $5,000 (the tax was 50%💝 in the years before 2023) and must file Form 5329.

He may request a waiver if he feels the failure is due to a reasonable error. However, John will receive an automatic waiver of the penalty if he withdraws the 澳洲幸运5官方开奖结果体彩网:account balance by Dec. 31, 2024, the fifth RMD year following the year his husband died, plus an extra year's extension (because 2020 isn't counted due to the CARES Act).

The Bottom Line

Missing your RMD deadline can be costly. To ensure it doesn't happen, make sure your distribution occurs by the deadline. You can arrange with your account 澳洲幸运5官方开奖结果体彩网:custodian for automatic withdrawals on a predetermined date. Submit your withdrawal requests well before the deadline, and check your statements to ensure thatꩲ the correct amount was distributed.