As most advisors know, missing an RMD carries a 50% penalty on the amount not withdrawn. In reality though, almost no one ever pays that penalty. The IRS allows it to be waived for good reason. Early in 2019, before the 2018 tax return is prepared, is the time to do a review and see if any 2018 or prior year RMDs were missed. This goes as well for inherited IRAs and inherited Roth IRAs. Roth IRA owners are not subject to RMDs but inherited Roth IRA owners are.
If you find that all or any part of an RMD was missed, remedy the situation and have the client make that up immediately, preferably by taking a separate distribution of only the makeup amount. This will make tracing the makeup distribution easier if it’s questioned in later years. If this is done before the 2018 tax return is prepared, the request to waive the 50% penalty can be included on the tax return and the problem can be resolved at the same time, without lingering on and requiring additional filings.
The 50% penalty waiver request is filed on IRS Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts). The 5329 form is included with the tax return.
In order for the IRS to allow the penalty waiver, a statement must be attached and it must include two items:
(1) It must state that the missed RMD was made up upon discovery (which is the reason to check that early in the year and take the makeup amount), and (2) it must provide the reason for not taking the distribution, which can be illness, family issues, advisor or tax preparer error, emotional stress from a divorce or lost job, or simply confusion about the calculation. No penalty need be submitted. The IRS will almost always waive the penalty, but not if the missed amount is not made up. That’s why it’s good to find this out early and fix it with the filing of the 2018 tax return. Problem solved. Client happy … and value added!
Ed Slott, CPA, is a recognized retirement tax expert and author of many retirement focused books. For more information on Ed Slott, Ed Slott’s 2-Day IRA Workshop and Ed Slott’s Elite IRA Advisor Group, please visit www.irahelp.com