IRA

Forgot to Take RMD in 2013? – What to do Next

March 14, 2014

Have you ever received a call from a client stating he/she may have forgotten to take the required minimum distribution (RMD) from an IRA or qualified plan?

If so, this post can provide you with options your client may want to take if he/she actually failed to take the RMD or did not take the full amount.

Let's say your clients have saved and enjoyed tax-deferred growth inside their IRAs (traditional, SEP, and SIMPLE), and/or qualified plans (e.g., 401(k) and 403(b)) and are now attaining age 70½. We all know the rule; for many, RMDs must begin at this point. Check out Gary Pence's RMD Deadline Is Approaching for more details about when RMDs must begin. Keep in mind; RMDs not only apply to owners, but also beneficiaries that inherit these assets in the form of inherited IRA or inherited Roth IRA.

What happens if the full RMD amount was not taken? The IRS will generally assess an excise tax equal to 50% of the RMD amount that was not taken. So, if your client was 72 years old in 2013 and his/her RMD was $3,600, but he/she only took $600 by December 31, 2013, he/she would be assessed a 50% excise tax of $1,500 ($3,000 X 50%) on the amount of shortfall. Whatever the reason for not taking the RMD, clients should work with their tax advisors, CPAs or attorneys and consider one of the following options.

Here are the options outlined in IRS Publication 590 (dated January 5, 2014) and IRC Section 4974(d).


Option 1: Pay the Excise Tax

Your client must report the 50% excise tax amount on IRS Form 5329. Refer to IRS Instructions for Form 5329 to assist in determining the excise tax owed and information about completing the form.


Option 2: Request a Waiver

If your client feels he/she failed to take the RMD due to a reasonable error and steps have been taken or will be taken to correct the error, he/she may ask the IRS to waive the 50% excise tax. The client will want to write a letter of explanation and include it with IRS Form 5329.

 

How to Avoid Failing to Take RMDs

Failing to take the RMD for a given year can be a frustrating and costly mistake. Don't forget, the client must pay the 50% excise tax and the income tax due on the RMD amount. Work closely with your client and the IRA provider to find out about enrolling in an automated withdrawal program to ensure the correct RMD amount is calculated and distributed each year.

Please check out our Understanding Distributions brochure and RMD Calculator for additional information about required minimum distributions.

If you have further questions regarding RMDs or the 50% excise tax on amounts not taken, contact the Retirement Strategies Group at (800) 722-2333, ext. 3939, or send an e-mail to RSG@PacificLife.com

Picture of Steve Chmelka

Steve is a Senior Retirement Strategies Consultant with the Retirement Solutions Division at Pacific Life. He brings more than 25 years of industry experience in financial planning and wealth management, including detailed knowledge of both employer-sponsored retirement plans and retirement-planning strategies.

Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.

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