Thu, August 15, 2013
When you reach the age of 70 ½, IRS rules generally require you to begin making distributions for most retirement plans. What happens if you fail to take a Required Minimum Distribution (RMD)?
The IRS is strict in its enforcement of required minimum distributions. The distribution is made, it’s taxable income, and the IRS wants to make sure that the funds which have been accumulating tax-free are eventually taxed.
Therefore, there is usually a 50% penalty due on any funds that should have been distributed but were not. You must file Form 5329 and pay the required penalty.
What if you believe that you have a good excuse for failing to make the distribution? The IRS handles such situations on a case-by-case basis; in some instances, it does waive or reduce the penalty. But the IRS is pretty strict, and you need a very good reason and it’s up to the IRS’s discretion to determine whether it’s good enough.
If you believe your excuse is likely to be accepted, here’s what to do:
(1) Take the RMD immediately.
(2) File Form 5329 without paying the penalty, and include a letter requesting the waiver and explaining the circumstances. The IRS has three years to decide whether to accept your plea. If it rejects your waiver, you must pay the amount owed with any required interest and penalties. In this situation, no news is good news.
So given the fact that no one enjoys filing extra tax forms, it's always best to make sure that you make your RMDs on time to minimize headaches. But in a situation where you reasonably can't help failing to make the distribution on time, the IRS may take pity on you.