Many retired individuals receive notifications from the IRS stating that they’ve missed their RMD for a given tax year and that they might be subject to penalties. Many of these same individuals wonder, “What is an RMD, anyway?”
Every person who owns an IRA – retired or not – needs to learn what these three letters stand for.
RMD means required minimum distribution, and it must be taken by owners of IRA accounts beginning in the year they turn 70 1/2. This is not always the year you turn 70; it is the tax year when you turn 70 1/2 (which could be the year following your 70th birthday).
For IRA or Roth account holders who received the account as the beneficiary of a deceased individual, RMDs must be taken in the year following the death of the benefactor.
RMDs are not to be taken lightly; penalties for missed RMDs are 50 percent of the amount not taken each year!
So if you realize that you have made a mistake and forgotten to take yours this past year, or for the past few years, just follow these steps to help resolve the situation.
1. First you need to calculate what your RMD should be. Start by determining the value of the IRA at the end of the year for which you missed your RMD (if you never took a RMD, start with the balance of the account for the year end prior to the year you turned 70 1/2).
2. Next, you need to determine the life expectancy factor for all missed years. IRA owners use their age each year and look up the corresponding factor on the Uniform Lifetime Table.
IRA beneficiaries should use their age only in the year after the account owner’s death and look up the corresponding factor on the Single Life Expectancy Table. In each subsequent year, a beneficiary will subtract one from the previous year’s factor. (Remember: These are the general rules for determining life expectancy factors. There are many exceptions to these rules.)
3. Then you simply divide the account balance by the life expectancy factor for each missed year’s RMD and withdraw that amount from the IRA. It is important to file IRS Form 5329 for each missed RMD to report the missed distribution and penalty.
Penalties may be waived for good cause. Attach a letter to the form requesting a waiver. It is helpful to include language in your letter explaining why the distributions were missed, that the problem has been corrected and (most importantly) that measures are in place to avoid future problems.
You can protect yourself and set up procedures to ensure you take future RMDs correctly. Many custodians offer options to distribute RMDs automatically each year. If you struggle to remember, this can be an easy way to ensure no future mistakes. It is also wise to talk to your financial and tax advisor to help ward off these problems in the future.