You missed a required minimum distribution

The penalty for missing a required minimum distribution (RMD) from an IRA or qualified retirement plan is one of the harshest in the tax code: 50% of the amount you should have withdrawn. Generally, you’re required to take RMDs from traditional IRAs and most employer- sponsored retirement plans beginning in the year you reach age 70½. RMDs are due by December 31 each year, although you may delay your first RMD until April 1 of the following year.

Given the severity of the penalty, it’s critical to ensure that you take RMDs on a timely basis. If you miss a distribution, however, you should act quickly to address the issue. The tax code provides for waiver of the 50% penalty if 1) missed RMDs were due to “reasonable error” and 2) you take “reasonable steps” to remedy the shortfall.

The first step is to calculate the correct amount and withdraw it from the account as soon as possible. Next, file Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts” with the IRS, either with your return or separately if you aren’t filing a return. There’s no need to pay the 50% penalty when you file the form, so long as you attach a letter (if the form is being filed independently of your tax return) or a statement (if the form is being filed with your tax return) requesting that the penalty be waived and explaining the reasons for the error and the steps you’re taking to correct it.

The IRS hasn’t provided formal guidance on what constitutes “reasonable error,” but potential excuses include financial institution error, serious illness and mental incapacity. It may also be possible to obtain a waiver for an IRA that’s inherited late in the year or that’s embroiled in a dispute over the rightful beneficiary.

Even if you take your RMDs on time, you may consider filing Form 5329, showing a penalty of zero. Doing so triggers the three-year statute of limitations and prevents the IRS from imposing penalties years or decades later on the grounds that you miscalculated a RMD.

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