An IRA can be a handy tool in saving for retirement. However, with that extra saving power comes lots of rules and regulations—one of those being required minimum distributions (RMDs). If you’re the custodian of a traditional IRA, or you’ve inherited an IRA, you’ll want to pay close attention to those RMD deadlines to avoid major penalties. Before we explore what you can do if you’ve missed an RMD, let’s revisit the RMD rules for both traditional IRAs and inherited IRAs.
For a traditional IRA, you won’t have to take your first RMD until April 1st of the year after you’ve turned 70 ½. For example, if your birthday was March 1, 2016, your half birthday would be in September, which means you would take your first RMD by April 1st of 2017. If your birthday was November 1, 2016, your half birthday would be in May, which means you wouldn’t have to take your first RMD until April 1, 2018. After that first RMD, all subsequent RMDs are due by December 31st every year. If you elected to wait to take your first RMD until April 1st, you would take your second one by December 31st of that same year.
The IRS calculates RMDs by dividing the funds in your account by your life expectancy. If you fail to take an RMD by the due date, you will owe 50% of the funds not taken to the IRS. For example, if you didn’t take any of your required $4,000 distribution, you will owe the IRS $2,000. Yikes! If you took $3,000 out, but forgot the last $1,000, you will owe the IRS $500.
Inherited IRAs operate slightly differently from traditional IRAs that you open yourself. If you’ve inherited an IRA (traditional or Roth), you are required to take your first RMD by December 31st after the year of the original account holder’s death. If the account holder had already reached age 70 ½, you must ensure they took their required RMD for the year of their death as well. RMDs will be calculated based on your own life expectancy once you’ve inherited the account. However, if you fail to take the first RMD, not only will you owe 50% of that RMD to the IRS, but you will also be required to empty all funds within five years of the original account holder’s death.
What to do if you missed an RMD
If you missed the deadline for an RMD, the first action you will want to take is to receive the distribution immediately, but not pay the 50% fee quite just yet. After you have withdrawn the funds, you will fill out a 5329 form. You can submit this form with your tax documents, or individually if you’ve already submitted your taxes. With this form you will provide an explanation as to why you missed the RMD. Maybe you were the victim of a natural disaster this year, were hospitalized for a long period of time, served jail time, or were given faulty advice from your financial advisor. Whatever the reason, include it with the form to help you plead your case to the IRS. Usually they will send you notification as to whether they waived the fee or not within a few months. If you have not heard from them in three years, the fee is automatically waived and you won’t have to worry about it anymore.
Remember, you will need to list any RMDs from a traditional IRA on your tax forms as they are regarded as taxable income. Also, don’t forget to take your next RMD by the deadline or you could be in the same situation, but with a far less lenient IRS.