3 Steps to Take If You Miss Your Required Minimum Distribution Deadline

Denise Appleby |

By Denise Appleby
Sept. 3, 2020

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Those who own a traditional individual retirement account (IRA) or another type of retirement account—such as SEP IRAs, SIMPLE IRAs, and 403(b) accounts—must withdraw a minimum amount from that account beginning at age 72 (or 70½, if they reached that age before Dec. 31, 2019). If the account holder fails to take an amount called the required minimum distribution (RMD) on time, and in the right amount, there can be a penalty. For every dollar not withdrawn, the IRS will charge a 50% penalty, known as the excise tax.1

However, the IRS won't charge you in 2020. On March 26th, 2020, the Senate unanimously approved a $2 trillion coronavirus emergency stimulus package. This suspended required minimum distributions from retirement accounts in 2020. This gives those accounts more time to recover from the stock market downturns and retirees who can afford to leave them alone, the tax break of not being taxed on mandatory withdrawals.

If, for any reason, you miss your deadline in a normal year, there are some steps you must take.

KEY TAKEAWAYS

  • Owners of a tax-deferred IRA or another type of retirement account must withdraw required minimum distributions from that account beginning at age 72 in order to avoid a penalty tax.
  • If a withdrawal is missed, the account owner must pay the penalty or submit a waiver request.
  • In some cases, those who inherited a retirement account from an owner who died before beginning RMDs can avoid the penalty by withdrawing the full balance of the account by Dec. 31 of the fifth year of the owner's death.
  • The $2 trillion coronavirus emergency stimulus package suspended required minimum distributions from retirement accounts in 2020.

Step 1: Pay the Excise Tax

The excise tax owed must be reported on IRS Form 5329 and IRS Form 1040 (your income tax return).2 3 The IRS website offers instructions for calculating the excise tax owed.4

However, by meeting certain exceptions, you are not required to file a tax return as explained in the instructions for filing Form 1040, 1040-SR, or 1040-NR, you must file Form 5329 by itself and pay the excise tax owed.5 6 Complete the form with the requested information and enclose your check or money order made payable to the United States Treasury. On the check, write your Social Security number, the current tax year, and "Form 5329."

Step 2. Request a Waiver

If you feel that you missed the deadline due to a reasonable cause, you may ask the IRS to waive the 50% excise tax. The request for waiver may be included in a letter of explanation, which you attach to your tax return (Form 1040) along with your Form 5329. When requesting a waiver, do not pay the excess accumulation penalty upfront. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, you will be notified.4

Step 3: Withdraw the Full Balance

In some cases, if you are a beneficiary who inherited a retirement-account from an owner who died before their required beginning date (RBD), you must begin withdrawing RMD amounts by a certain time. That deadline is Dec. 31 of the year following the year in which the owner of the retirement account died. You must also withdraw an RMD amount by Dec. 31 of each subsequent year.7 (Under the new provisions of the SECURE Act of 2019, this scenario has gotten much less common; but it may still apply to spousal beneficiaries, beneficiaries less than 10 years younger than the deceased, or those who inherited an account prior to Dec. 31, 2010.)

While the excise penalty will generally apply if you did not withdraw the RMD amount on time, the penalty may be waived if you switch to the five-year rule and withdraw the full balance of the account by Dec. 31 of the fifth year following the year the retirement account owner died.7 Let's look at the following example:

In 2018, John, aged 63, inherited an IRA from his brother Ron, who died at age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:
 

  1. John can distribute the assets over his single life expectancy. For most IRA plan documents, this is the default option and is consistent with the provisions of RMD regulations.
  2. John can distribute the assets by Dec. 31 of the fifth year following the year Ron died.7
     

John chooses the life-expectancy option. The RMD for 2019 is $10,000, but John fails to withdraw any amount by Dec. 31, 2019. If John wants to continue using the life-expectancy method, he will have to pay the IRS an excise tax of $5,000 and must file Form 5329. He may request a waiver if he feels the failure is due to a reasonable cause. John, however, will receive an automatic waiver of the penalty if he withdraws the account balance by Dec. 31, 2023, the fifth RMD-year following the year Ron died.

It may not be practical to switch to the five-year rule solely because you missed the RMD deadline. A competent financial professional can help you determine the best course of action—for example, whether it is more financially sound for you to pay the excise tax so that you continue enjoying tax-deferred growth (or tax-free growth in the case of a Roth IRA), or whether it makes more sense to accept the waiver and distribute the assets within the five-year period.

The Bottom Line

Missing your RMD deadline can be frustrating and costly. To ensure it does not happen, take the necessary steps to make sure your distribution occurs by the applicable deadline. This includes making arrangements with your custodian for systematic or automatic withdrawals to occur on a predetermined date. Submit your withdrawal requests at least two months before the deadline and check your statements to ensure the correct amount was distributed from your account.

Submitting your requests early allows sufficient time for any necessary adjustments.

  1. Internal Revenue Service. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed March 17, 2020.
  2. Internal Revenue Service. "Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts." Accessed March 17, 2020.
  3. Internal Revenue Service. "Form 1040: U.S. Individual Income Tax Return." Accessed March 17, 2020.
  4. Internal Revenue Service. "Instructions for Form 5329," Page 8. Accessed March 17, 2020.
  5. Internal Revenue Service. "1040 and 1040-SR Instructions," Page 11. Accessed March 17, 2020.
  6. Internal Revenue Service. "Instructions for Form 1040-NR," Page 7. Accessed March 17, 2020.
  7. Internal Revenue Service. "Publication 590-B: Distributions from Individual Retirement Arrangements (IRAs)," Page 9. Accessed March 17, 2020.

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