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Military Finances 301: Mom (or Dad) Missed Her RMD. Now What? Thumbnail

Military Finances 301: Mom (or Dad) Missed Her RMD. Now What?

Taxes

The “R” in RMD stands for Required (the MD stands for Minimum Distribution). Once a taxpayer passes the age of 70 ½, he or she will have RMDs from all retirement accounts with the exception of Roth IRAs. In most cases sponsors of employer provided plans (401(k), 403(b), TSP as examples) won’t let you miss an RMD. If working with a financial advisor that is worth his or her “salt”, missed RMDs shouldn’t happen either. But what if neither of these cases apply to Mom and she misses an RMD?

A missed RMD is subject to an excise tax of 50% of the RMD. You read that right, a 50% tax. You can of course have Mom pay the penalty. Or you can ask the IRS for a penalty abatement. Now you may be thinking, “Right. Asking the IRS for forgiveness sounds like a good idea!” Well, in this specific case, Congress directed that the IRS can waive the penalty if the failure to take the RMD was due to “reasonable error” and “reasonable steps” have been taken to make sure it doesn’t happen again.

So, how do you fix the problem? The first thing to realize that if you don’t try to fix the problem, the statute of limitations will never be triggered and the potential for penalty will never end. So, here are the basic steps to take.

  1. Calculate and take the RMD as soon as you find out it was missed.
  2. Take steps to make sure it never occurs again.
  3. Remember, you’ll need to take an RMD for the current year and procedures in place at an employer plan or with an advisor may not protect you. The systems may assume the distribution was for the current year.
  4. Complete an IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. 
  5. Send the Form 5329 along with a letter explaining what happened and how you’ll make sure it won’t occur again.

Once you mail in the package, the statute of limitations will start and I’m not aware of any cases where the IRS hasn’t granted the abatement, if it was indeed an honest mistake. Pretty simple. But, completing the Form 5329 is not simple. Especially if you’re good a following directions. You actually have to ignore the instructions written on the form to get the penalty abated. Let’s walk through it.

  • You’ll complete the identification information on the top of the form. You can follow the instructions here.
  • You’ll then jump down to Part IX of the form and complete the following lines

Line 52. Minimum required distribution for 2018 (or year missed) – Follow the directions here and enter the amount that should have been taken out of the account.

Line 53. Amount actually distributed to you in 2018 (or year missed) – Follow the directions. If the RMD was missed, the amount is likely “0”.

Line 54. Subtract line 53 from 52. If zero or less, enter “0”. – IGNORE THE INSTRUCTIONS. Do the following instead.

Enter “O”

Write “RC” and the amount of the missed RMD on the dotted line

Line 55. Additional tax. Enter 50% of line 54. – Follow the instructions. The result should be “0”

For most of us, around the time we’re retiring from the military, Mom and Dad start to need a bit more help. If one of them make this mistake, you can be the “good” son or daughter by helping him or her out. If you need some help, let us know.

If you enjoyed this article, you might like the following blog posts:

6 Signs Your Elderly Parents Might Need Help with Their Finances


Watch Out for This Tax Tripwire


Minimum Distribution Rules: Key Things Every Retired Military Officer Should Know





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