An IRA Owner Missed His RMD Deadline—What Can We Do?
By Jodie Norquist, CIP, CHSP
If you handle IRAs at your financial organization, it’s likely you’ll be the one to inform clients of the tax consequences of a missed required minimum distribution (RMD) deadline. If they fail to take an RMD, they’ll owe a 50 percent excess accumulation penalty tax to the IRS for the amount they didn’t withdraw timely.
Ouch.
Through our 800 Consulting lines, Ascensus IRA consultants often receive calls from financial organizations asking how they can help their clients when they miss an RMD. Understandably, financial advisors don’t want their clients to have to pay such a steep penalty for a mistake, attributed to either the account owner or the financial organization. Sometimes the clients themselves, after claiming to have consulted with a tax advisor, will ask if the financial organization can correct the tax reporting to reflect that the RMD was taken in the previous tax year.
Here's the bad news. There isn’t much you can do to help. Ultimately, it’s the account owner’s responsibility to make sure the correct RMD amount is taken timely. Once that deadline has been missed, you shouldn’t backdate an IRA distribution to make it appear as though it was taken in an earlier tax year. Frankly, this may create problems for your organization during a compliance audit, and possibly for your client if also audited by the IRS.
However, there are ways to help prevent clients from missing an RMD in the first place.
Inform Clients of RMD Rules
IRA owners are sometimes unaware that the IRS requires them to withdraw a minimum amount from their Traditional, SEP, or SIMPLE IRAs by April 1, following the year they turn 72. This date is called the required beginning date (RBD). All RMDs in subsequent years must be taken by December 31. For example, if your client turns 72 in 2022, he must withdraw his 2022 RMD by April 1, 2023. His 2023 RMD must be taken by December 31, 2023. (Roth IRAs do not require RMDs for account owners.)
The CARES Act waived all RMDs for IRA owners and beneficiaries in 2020, which may have caused further confusion for those coming of RMD age at the time. On top of this, the SECURE Act of 2019 increased the RMD age from 70½ to 72. So those born on or after July 1, 1949, must begin taking RMDs at age 72; those born before that date should have started taking RMDs at age 70½.
Financial organizations are required to provide RMD statements to Traditional and SIMPLE IRA owners by January 31 of the year that an RMD is due. (This rule does not apply to IRA beneficiaries.) Your organization may choose from two reporting alternatives to satisfy this requirement.
Under Alternative #1, the statement must
inform the IRA owner that an RMD is due for the calendar year;
include a projected RMD amount, which can be based on the Uniform Lifetime Table
notify the IRA owner of the date by which the RMD must be distributed; and
include a statement that the IRS will receive a report indicating that the IRA owner is
required to receive an RMD for the year.
Under Alternative #2, the statement must
inform the IRA owner that a minimum distribution from the IRA is required for the calendar year;
include an offer to provide, upon request, a calculation of the RMD amount for that calendar year;
notify the IRA owner of the date by which the RMD must be distributed; and
include a statement that the IRS will receive a report indicating that the IRA owner is required to receive an RMD for the year.
With Alternative #2, if the IRA owner requests an RMD calculation, your financial organization must calculate and report the RMD amount to the IRA owner.
The IRS allows financial organizations to use Form 5498, IRA Contribution Information, to satisfy the RMD statement requirement if they provide the form by the January 31 RMD statement deadline. (A financial organization may have to submit a revised Form 5498 if the IRA owner makes a prior-year contribution after the RMD statement is sent.)
Educating your clients on IRA rules can help lessen the confusion and the potential for a missed RMD.
Handling Missed RMDs
While a missed RMD is the IRA owner’s responsibility, some financial organizations, as a courtesy, contact IRA owners near the end of the year if they haven’t yet taken their RMD. Sometimes this yields news that the IRA owner has died. In these circumstances, the RMD still must be withdrawn; however, it must be withdrawn by the IRA beneficiaries. If an IRA owner is alive at any time during the calendar year and does not take an RMD before his death, then the beneficiaries must withdraw that amount by December 31 or they could face a 50 percent penalty tax on the missed RMD.
Year-Of-Death RMDs
The proposed RMD regulations, released in February 2022, include an automatic waiver of the 50 percent excess accumulation penalty tax for beneficiaries who don’t remove the year-of-death RMD by December 31 of the year of death. Under the proposed RMD regulations, If the IRA owner failed to take the year-of-death-RMD, the beneficiary must withdraw the RMD by the beneficiary’s tax filing deadline, including extensions, for the year of death. If satisfied by that date, the 50 percent penalty tax that would otherwise be imposed on a beneficiary is automatically waived.
Waiving the Penalty Tax Generally
If a client missed an RMD, the IRS may be willing to waive the excess accumulation penalty tax for the IRA owner or beneficiary if the situation meets certain requirements. The IRA owner can apply for a penalty tax waiver if he can show that the missed RMD was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. IRA owners who want to apply for the waiver must file IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their tax return, according to its instructions, and attach a letter of explanation.
It is advisable that the IRA owner or beneficiary withdraw the missed RMD amount, even past the deadline. This is presumed if a penalty waiver is being sought, and is a demonstration of “good faith” even if it is not. Your financial organization can help the IRA owner withdraw the required amount and will report the distribution on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., using the appropriate distribution code in Box 7 (code 7 for IRA owners and code 4 for beneficiaries).
Paying the Penalty Tax
If your client decides to pay the penalty tax and not to apply for the penalty tax waiver, then—according to comments to Ascensus from an IRS official— the RMD does not need to be removed from the IRA. IRA owners may pay the penalty tax by filing Form 5329 with their federal income tax return. According to this IRS official, the missed RMD amount may remain in the account as part of the IRA balance.
However, any missed RMD amount that was not distributed is still considered to be an RMD and is not eligible to be rolled over in the future. Specifically, in any future year, if more than that year’s RMD is withdrawn from an IRA, that additional amount is considered to be all or part of the previously-unsatisfied RMD, and cannot be rolled over.
If your client isn’t sure what step to take next, encourage her to seek competent tax advice. A tax advisor can help your client decide whether to pay the penalty tax or apply for the waiver.
