How to Correct a Missed RMD

Required Minimum Distributions (RMDs) are an essential aspect of retirement account management. They ensure that individuals withdraw a minimum amount from their retirement accounts annually, starting at age 73. However, missing an RMD can happen, and understanding how to correct this oversight is crucial to avoid hefty penalties.

What Happens If You Miss an RMD?

If an individual fails to take an RMD, they must rectify the situation by withdrawing the missed amount as soon as possible. The IRS imposes an excess accumulation penalty tax of 25% on the amount not taken. Fortunately, if the failure is corrected in a timely manner, this penalty can be reduced to 10%.

Prior to 2023, the penalty for missing an RMD was a staggering 50%, and there was no provision for a reduced penalty. This change offers some relief to account holders who act quickly to correct their mistake.

Steps to Correct a Missed RMD

1. Take the Missed RMD Immediately

The first step is to withdraw the total missed RMD amount as soon as you realize the oversight. This action demonstrates your intention to comply with IRS requirements and can help to potentially reduce the penalty.

2. Understand the Correction Window for Reduced Penalty

To qualify for the reduced 10% penalty tax, the RMD must be satisfied within a specific correction window. This window begins on the date the penalty tax is imposed and ends at the earliest of the following dates:

• The date a notice of tax deficiency is mailed
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• The date the penalty tax is assessed (recorded)
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• The last day of the second taxable year beginning after the year in which the penalty tax is imposed

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3. File IRS Form 5329

To address the penalty tax or apply for a waiver, account owners must file IRS Form 5329 alongside their federal income tax return. This form is used to report additional taxes on IRAs and retirement plans, including the excise tax on excess accumulations.

Conclusion

Missing an RMD can result in substantial penalties, but understanding how to correct this mistake promptly can significantly reduce the financial burden. By taking the missed distribution immediately, understanding the correction window, and filing the appropriate forms, individuals can effectively navigate the complexities of missed RMDs.

If you find yourself in this situation, consulting with a financial advisor or tax professional is highly advisable to ensure compliance and minimize penalties. Being proactive and informed is the best strategy to manage your retirement funds efficiently.