If you are subject to the required minimum distribution (RMD) for 2013 and do not take your RMD amount by the deadline, you will owe the IRS an excess accumulation penalty of 50% of the RMD shortfall. The good news is that the penalty can be waived if the right steps are taken. The following highlights the RMD rules and the steps that can be taken if you missed your RMD deadline due to reasonable cause.
When is the Deadline for Taking an RMD?
Let’s start by determining the deadline by which an RMD must be taken from a retirement account.
If you are the Retirement Account Owner
The deadline for taking a required minimum distribution (RMD) is usually December 31 of the year to which the RMD applies. However, there are two exceptions:
- If you reached age 70½ during 2013, the deadline for taking your 2013 RMD is April 1, 2014. All subsequent RMDs must be withdrawn by December 31 of the year to which the RMD applies.
- If you are older than age 70½ in 2013, and have assets in a retirement plan that allows RMDs to be deferred past age 70½ until you retire, your first RMD for those assets is due by April 1 of the year following the year that you retire. This option can apply only to qualified plans, 403(b) plans and 457(b) plans, and cannot be made available to individuals who own more than five percent of the business that sponsors the plan (5% owners).
If You are a Beneficiary
If you own an inherited retirement account, you are required to withdraw beneficiary-RMD amounts by the end of 2013, if any of the following applies:
- You are subject to the life expectancy rule and the retirement account owner died before 2013.
- You are subject to the five year rule and the five year period expires at the end of 2013.
Under the five year rule, distributions are optional until the end of the fifth year, at which time the entire balance must be withdrawn from the account.
What to do if You Missed Your RMD Deadline
If you missed your RMD deadline, you owe the IRS an excess accumulation penalty of 50% of the shortfall. For instance, if the RMD for 2013 is $10,000 and only $2,000 is withdrawn by the deadline, you will owe the IRS an excess accumulation penalty of $4,000 ($8,000 x 50%). In such cases, you have two choices:
- Pay the IRS the penalty. This is calculated on IRS Form 5329 (under the section labeled “Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs)” and reported in the ‘other taxes’ section of your tax return (Form 1040). Important note: You cannot file Form 1040A or 1040EZ if you file Firm 5329. Instead, you must file Form 1040.
- Ask the IRS to waive the penalty. The IRS will waive the penalty, if you can show ‘reasonable cause’ for not taking the RMD. If you feel that you qualify for a waiver, you should File Form 5329 and attach a letter of explanation to the IRS.
When applying for the waiver, you need to take the missed required minimum distribution (RMD) amount as soon as possible.
Professionals Can Help
If you need help with your RMD, you should consult with a professional who is proficient in the area of distribution-planning for retirement accounts. While the calculation of your RMD might seem simple, there are factors that must be taken into account to ensure the calculation is correct. Professionals will help to ensure that these are not overlooked when handling your case.
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