In general, owners of traditional IRAs and participants in qualified retirement plans who are over age 70½ must take a required minimum distribution (RMD) every year. However, non-5%-owner participants in qualified retirement plans who continue to work after age 70½ may delay their RMD until they actually retire, but only if allowed by the plan.
The first RMD may be delayed until the April 1st following the year that the distributions are required to begin. Failure to take a RMD timely triggers a 50% excise tax on the amount of the underpayment. The penalty tax is payable by the taxpayer or, if deceased, the beneficiary. However, the Internal Revenue Service (IRS) can waive the penalty if the taxpayer can show that any shortfall in the amount of the RMD is due to reasonable error and if adequate steps were taken to remedy the violation. A taxpayer can request a waiver of the penalty by following these steps:
- Take the missed required minimum distribution as soon as it is discovered.
- File IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. The penalty tax is not required to be paid with the form.
- Attach to IRS Form 5329 a statement explaining the shortfall and the steps taken to rectify the error. The IRS offers no formal definition on what constitutes a “reasonable error,” but some acceptable explanations might include: illness, a death in the family or a change in address that disrupted essential communication regarding the required minimum distribution.
Following submission of IRS Form 5329, the IRS will review the information and respond. While there is no guarantee, there is a good chance the IRS will waive the penalty tax.
Failure to take an RMD from a qualified retirement plan can result in plan disqualification. The plan sponsor can file an application with the IRS under their Voluntary Correction Program (VCP) to report the missed RMD and request a waiver of the excise tax on behalf of the affected participants and beneficiaries.
Since RMD failures are not uncommon, it is important that plan sponsors take appropriate steps to monitor the age of all participants who are approaching age 70 to avoid missing any RMD. Taxpayers should take the necessary steps to make sure the correct distribution occurs each year. It is good practice to take an inventory of every retirement account that is subject to the RMD rules at the beginning of each year.
If you have any questions or would like more information, please contact Connie Lee at clee@windes.com or 844.4WINDES.