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What To Do if You Forgot Your RMD

If you’re at least 72 years old this year, here’s a really important question for you: did you take your required minimum distributions (or “RMDs”) from your pre-tax retirement accounts for this year yet? 

If not, it’s probably a good idea to get that taken care of sooner rather than later. There are several reasons why we think it’s better to take your RMDs earlier in the year, but no matter when you do, for most IRA and defined benefit contribution plan owners, the deadline to get it done is December 31st of each year. And the penalty for not taking your RMD is a stiff one: it’s 50% of the amount that you missed. So if your RMD was, say, $4,000 in a given year and you didn’t take it out on time, the IRS will tack on a $2,000 penalty tax. That hurts!  

We should mention here that if you didn’t take an RMD for 2020, you’re fine, because Congress waived the RMD rules for that year.  But they’re back for 2021, you’ve got to take at least the minimum out. 

But what if you do miss the deadline?  Well, you might still be okay, because there are some exceptions, and there may be a few ways to correct your mistake in order to avoid the penalty tax. 

Is this your first RMD?

Here’s one way: if you reached age 72 sometime in 2021, and then December 31st comes and goes, you’ll still have a little bit of time next year. In that case, because it’s your FIRST RMD, YOUR deadline for this RMD is April 1 of the 2022. But remember, that’s only good for your first RMD –  you’ll still have to also take your 2022 RMD before December 31. 

Are you still working?

Another exception is if you’re still working and you’re a participant in your company’s qualified retirement plan. As long as you’re still working for them and you don’t own 5% or more of the company, you do not have to take an RMD from that company’s plan. Keep in mind, though, that this would only affect your current employer’s plan. All other IRAs or former employer plans will still have a RMDs for the year. 

What other options do you have?

But even if you’re well over age 72 and for whatever reason you missed the previous year’s RMD, don’t panic – just follow these three steps and you *might* see the penalty waived: 

First: Take the missed RMD! Get that done. The IRS won’t even consider removing the penalty if you haven’t corrected your mistake first. 

Next, file the previous year’s IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. You don’t have to pre-pay the penalty when you file the form, but if you don’t, you might owe interest on the penalty payment. However, filing Form 5329 does start the statute of limitations clock. 

The next step is to attach a letter of explanation to that Form 5329. It should state why you missed the RMD, the fact that the RMD has now been taken, and that you’ve taken steps to ensure that you won’t miss any future RMDs. What you’re essentially saying is that you made a “reasonable error.” There’s no formal guidance on what a “reasonable error” is, but it could potentially be an illness, a death in the family, a change of address that disrupted essential communication on the RMD, or even incorrect professional advice. 

From there, just wait for the IRS to respond. While there’s no guarantee that they’ll waive the penalty, you at least stand a better chance than if you did nothing at all. It’s time consuming, but it’s well worth the effort if it works. 

RMDs can be tricky, and as we said, the penalty for getting it wrong is brutal.  But beyond that, RMDs can affect other areas of taxation that may cause you to jump up unexpectedly into another bracket, or push your Social Security benefits into the taxable column. We deal with RMD issues every day here at Lucia Capital Group. How can we help you? Just give us a call! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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