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.
Traditional (including simplified employee pension – SEP) and 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 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 and SIMPLE IRA owners who were not age 70½ by the end of 2019 did not need to begin taking RMDs until they attain age 72, with the first one being 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 and SIMPLE IRA owners who were not age 72 by the end of 2022 (i.e., born in 1951 or later) do not need to begin taking RMDs until they attain age 73, with the first one being 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 RMD applicable to 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.
Penalty for not taking an RMD timely
If an RMD amount is not withdrawn before the applicable deadline an excess accumulation penalty tax applies. For 2023 and subsequent year RMDs, IRA owners and IRA beneficiaries are subject to a 25 percent excess accumulation penalty tax on an amount not taken, with the potential to have the penalty tax reduced or waived entirely. For example, if a 2023 RMD of $4,000 is not taken an excess accumulation penalty tax of $1,000 (i.e., $4,000 x .25 = $1,000) applies. With respect to possible reduction of the 25 percent penalty tax, if an IRA owner or beneficiary withdraws the RMD amount within a correction window (i.e., not more than two years but possibly less) the 25 percent penalty tax is reduced to 10 percent. The excess accumulation penalty tax for 2022 and previous years was 50 percent of the RMD amount not taken. 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 penalty tax entirely. When requesting a waiver of an excess accumulation penalty 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 penalty tax by writing an explanation to the IRS explaining 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 letter of explanation is attached to IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, without payment for the penalty. An IRA owner (or beneficiary) waits for a reply from the IRS stating whether a penalty is due.
Example without reasonable cause:
George, age 82 in 2022, had a traditional IRA RMD of $3,200 for 2022. For no specific reason, George did not take his 2022 RMD by December 31, 2022. On January 9, 2023, George withdrew an amount equal to his 2022 RMD. George completes IRS Form 5329 and pays a penalty tax of $1,600 (i.e., 50 percent of the amount not taken for years prior to 2023) with his 2022 tax return. Keep in mind, because George removed his 2022 RMD in 2023, the distribution is reported on a 2023 IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as taxable income for 2023.
Example with reasonable cause:
Brittany, age 75 in 2022, had a traditional IRA RMD of $9,000 for 2022. As Brittany was in a car accident, she was unable to take her 2022 RMD by December 31, 2022. On January 16, 2023, Brittany withdrew from her IRA an amount equal to her 2022 RMD. Brittany wrote a letter, which she attached to IRS Form 5329 and her 2022 tax return, explaining to the IRS the reason for which she did not take her 2022 RMD timely and indicated that she has since taken it. The distribution is reported on a 2023 IRS Form 1099-R as taxable income for 2023. The IRS, when considering the circumstances, will determine whether the 50 percent penalty tax will be waived.
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 excess accumulation penalty tax.
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 excess accumulation tax, 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.
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 reduced excess accumulation penalty tax for 2023 and later year RMDs. IRA owners and beneficiaries are liable for the tax, however, if there is reasonable cause for not taking an RMD by the deadline, the IRS might waive the penalty 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 excess accumulation tax. 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.