IRS Form 5329
ComplianceTax & AccountingMay 16, 2023

IRA required minimum distribution not satisfied: Penalty and penalty waiver request

Updated March 21, 2024

Overview

A common individual retirement account (IRA) related question asked at the beginning of each year is, “What should an IRA owner (or beneficiary) do if he/she did not take his/her required minimum distribution (RMD) amount by the December 31 deadline?” This article provides an answer to this question.

RMD deadline

Traditional, traditional simplified employee pension (SEP), and traditional Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA owners that attained age 70½ before 2020 were required to begin taking RMDs upon attainment of age 70½. These traditional ‘type’ IRA owners had until April 1 of the year after their age 70½ year to take their first RMD. This date is referred to as the required beginning date (RBD). As a result of the SECURE Act, effective for years after 2019, traditional type IRA owners who were not age 70½ by the end of 2019 were not required to begin taking RMDs until they attained age 72, with the first one required by April 1 of the year after attainment of age 72. As a result of the SECURE 2.0 Act, effective for years after 2022, traditional type IRA owners who were not age 72 by the end of 2022 (i.e., born in 1951 or later) are not required to begin taking RMDs until they attain age 73, with the first one required by April 1 of the year after attainment of age 73. In any case, the deadline for an IRA owner to satisfy his/her RMDs for each subsequent year is December 31 of that year. Additionally, a beneficiary of a decedent’s IRA who is subject to an annual RMD must remove the RMD amount by the end of each year or by the end of a 5-year period or 10-year period (with annual withdrawals when applicable) when such rule applies.

Additional tax for not taking an RMD timely

If an RMD amount is not withdrawn before the applicable deadline an ‘additional tax on excess accumulation’ applies. For 2023 and subsequent year RMDs, IRA owners and IRA beneficiaries are subject to a 25 percent additional tax on an amount not taken, with the potential to have the tax reduced or waived entirely. For example, if a 2023 RMD of $4,000 is not taken an additional tax of $1,000 (i.e., 25 percent of $4,000) applies. With respect to the possible reduction of the 25 percent additional tax, if an IRA owner (or beneficiary) withdraws the RMD amount during the correction period defined in the Instructions for Form 5329 the 25 percent additional tax is reduced to 10 percent. If the deadline to satisfy an RMD is missed due to reasonable cause, an IRA owner (or beneficiary), with the aid of a tax professional, may ask the Internal Revenue Service (IRS) to waive the additional tax entirely. When requesting a waiver of an additional tax on excess accumulation tax it is prudent for an IRA owner (or beneficiary) to withdraw the RMD amount as soon as he/she realizes it was not taken timely. An IRA owner (or beneficiary) may request a waiver of the additional tax by providing a ‘statement of explanation’ to the IRS indicating why the RMD amount was not taken by the deadline, and the fact that he/she has remedied the “shortfall” by removing the RMD amount after the deadline. The statement of explanation is attached to IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, without payment of the additional tax. An IRA owner (or beneficiary) waits for a reply from the IRS indicating whether an additional tax is due.

Example with reasonable cause and timely correction:

Brittany, age 75 in 2023, had a traditional IRA RMD of $10,000 for 2023, however, due to an extended illness during 2023 Brittany failed to take her RMD by December 31, 2023. On January 16, 2024, Brittany withdrew from her IRA an amount equal to her 2023 RMD. The distribution is reported on a 2024 IRS Form 1099-R as taxable income for 2024. After reviewing the Line 54 information found in the 2023 Instructions for Form 5329, Brittany appropriately fills out Lines 52 through 55 of IRS Form 5329 requesting a waiver of the additional tax on excess accumulation and attaches a statement of explanation to IRS Form 5329 which she includes with her 2023 tax return. The IRS will determine whether to grant Brittany’s waiver request after reviewing the documentation that she provided.

Example without reasonable cause but timely correction:

Tom, age 78 in 2023, had a traditional IRA RMD of $4,000 for 2023. For no apparent reason, Tom did not take his 2023 RMD by December 31, 2023, however, on January 20, 2024, Tom took an amount equal to his 2023 RMD. After reviewing the Line 55 Worksheet (Part I) found in the 2023 Instructions for Form 5329, Tom determines that he qualifies for a reduction of the additional tax on excess accumulation. Tom appropriately fills out Lines 52 through 55 of IRS Form 5329, which includes checking the box next to Line 55, attaches it to his 2023 tax return, and includes a $400 additional tax payment (i.e., 10 percent of $4,000) with his 2023 tax return.

Example without reasonable cause and no timely correction:

George, age 82 in 2023, had a traditional IRA RMD of $3,200 for 2023. For no apparent reason, George did not take his 2023 RMD by December 31, 2023, and failed to take it during the correction period defined in the 2023 Instructions for Form 5329. After reviewing the Line 55 Worksheet (Parts I and II) found in the 2023 Instructions for Form 5329, George determines that he does not qualify for a reduction of the additional tax on excess accumulation. George appropriately fills out Lines 52 through 55 of IRS Form 5329, attaches it to his 2023 tax return, and includes an $800 additional tax payment (i.e., 25 percent of $3,200) with his 2023 tax return.

IRA owner’s year of death RMD

The proposed RMD regulations, issued in February of 2022, provide a beneficiary of a deceased IRA owner, or a successor beneficiary of a deceased primary beneficiary, extra time to take the decedent’s RMD for the year of death. If a decedent had not satisfied his/her RMD for the year of death, the beneficiary (or successor beneficiary) may take the RMD by the beneficiary’s tax due date including extensions for such year, effectively avoiding an additional tax on excess accumulation.

IRA custodian/trustee responsibilities

IRA custodians/trustees are required to notify IRA owners of their RMD by providing them with an RMD notice by January 31 each year. The notice informs an IRA owner of the deadline to take his/her RMD, the amount of the RMD or that the amount will be calculated upon the IRA owner’s request and indicates that the RMD status will be reported to the IRS. An RMD notice is not required for beneficiaries.

An IRA custodian/trustee is not responsible for ensuring that an IRA owner or beneficiary takes his/her RMD before the deadline. However, it is common for IRA owners and beneficiaries to request scheduled payments of the RMD amount each year. If an IRA custodian/trustee fails to distribute an RMD as instructed, the IRS views it as the IRA owner (or beneficiary) failing to take the RMD. Therefore, the IRA owner (or beneficiary) is subject to the additional tax on excess accumulation, not the IRA custodian/trustee.

Some IRA custodians/trustees have a policy stating that if an IRA owner or beneficiary fails to take an RMD, they will automatically pay out the calculated RMD amount prior to the deadline. Other IRA custodians/trustees choose to do nothing. Either policy is acceptable.

Conclusion

As it relates to the failure to take an RMD amount timely, the same rules apply to IRA owners and IRA beneficiaries. This includes a reduction to the additional tax on excess accumulation for 2023 and later year RMDs. The additional tax on excess accumulation for 2022 and previous years was 50 percent of the RMD amount not taken. Though IRA owners and beneficiaries are liable for the tax, if there is reasonable cause for not taking an RMD by the deadline, the IRS might waive the additional tax upon request. Keep in mind that it is the responsibility of IRA owners and IRA beneficiaries to understand the RMD rules and take RMD amounts timely to avoid the additional tax on excess accumulation. Information regarding the RMD and the excess accumulation tax can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.

Senior Specialized Consultant, Tax Advantaged Accounts
With more than 36 years of experience, Steve has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program. Steve also has an extensive background in working with employer qualified plans.
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