Did Your Client Fail to Take The RMD?

Ellie Lowder, TGPC, Consultant

Your client had a required minimum distribution (RMD) due by Dec. 31, 2015, but failed to take it. Because that is a costly error (a 50% IRS penalty is applied to the amount that should have been taken, but wasn’t), your client is in a state of panic. What should your client do?

Actions to Take

• Because the IRS can waive the 50% penalty and often does if there is a good reason why the RMD wasn’t taken, here is what your client should do:
• Take the RMD. To have any hope of having the penalty waived by the IRS, your client   must correct the error. The RMD amount that was not taken in 2015 must be taken.
• File the 2015 IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. When this form is filed, your client does not have to prepay the penalty, but if the form is filed without payment of the 50% penalty and the IRS determines that the penalty is owed, interest could be owed on the penalty payment. Form 5329 must be filed to start the statute of limitations clock. Or, your client could include a check for 50% of the amount not timely taken which avoids interest, should the IRS waive the penalty.
• Attach a letter of explanation to Form 5329. The letter should include why the 2015 RMD was missed, the fact that it has now been taken and that steps taken to be sure that future RMDs will be taken as required. For example, many of the providers will allow your client to sign up for calculation and automatic distribution of future RMDs. Help your client with the proper form for that service and recommend that be a part of the explanation to the IRS about steps taken to avoid future errors.

After the request is submitted, wait for the IRS response. If a check was included with Form 5329, the response might be a refund of that amount. Be prepared to wait a few months to hear from the IRS — or, if  the IRS has not responded within three years of the date the Form 5329 is filed, there is a considerable chance that the IRS granted the penalty tax waiver.

Ellie Lowder, TGPC, Consultant