Prevent Missed RMDs—and the Extra Work That Follows

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How often are you contacted by IRA clients after the start of a new year who say, “I forgot to take my required distribution; can I take it now?” You’re busy enough during that time processing IRA owner prior-year contributions, preparing Form 1099-R reports, and getting fair market value and required minimum distribution (RMD) statements out the door. Dealing with missed RMDs is an added burden. One way to eliminate this burden is with scheduled automatic payments.

Automatic Payments Help You and Your Clients

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While it is ultimately the IRA owner’s or beneficiary’s responsibility to take an RMD, setting up a schedule for them to receive IRA distributions automatically at certain times of the year will lessen the amount of time your organization spends on RMD maintenance. Scheduled RMD payments can be set up annually, semi-annually, quarterly, monthly, or on any payment schedule the individual prefers or that the financial organization approves, as long as the total RMD amount for the year is taken by the deadline.

Traditional (and SIMPLE) IRA owners age 70½ or older and IRA beneficiaries who have chosen to take annual single life expectancy payments are required to take IRA distributions annually, generally by December 31. Those who do not are subject to a 50 percent excess accumulation penalty tax. That means the IRA owner or beneficiary will have to pay the IRS an amount equal to half of the RMD amount that was not taken. For example, if the missed RMD is $4,000, the IRA owner or beneficiary will owe an IRS penalty tax equaling $2,000. Thus, automatic payments could potentially save your clients money in penalty taxes.

IRA owners and beneficiaries who do miss their RMDs must file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal income tax returns to pay the 50 percent penalty tax. They can apply for a waiver of the penalty but there is no guarantee the IRS will approve it. Some may ask their IRA trustee or custodian to write a letter on their behalf if the missed RMD was because of financial organization error—yet another RMD task that takes time during the busy tax season.

Setting Up Automatic Payments Will Pay Off

Establishing scheduled automatic payments not only reduces the number of missed RMDs, but lessens the amount of time your staff spends chasing down IRA owners and beneficiaries late in the year, talking to angry clients who attempt to blame you for their mistake, and processing withdrawals.

A recent review of the Ascensus IRA Fully-Administered Program shows that 85 percent of IRA owners who are in RMD status (i.e., age 70½ and older) are on scheduled payments. That figure is significant as it translates into a substantial reduction in the number of potential mistakes.

No one wants upset clients coming to them with costly penalties from the IRS. Avoiding missed RMDs altogether is best. Learn how you can use Ascensus’ IRA administered services to set up scheduled payments and to reduce other IRA compliance burdens.