It’s not unusual to forget or overlook your Required Minimum Distribution obligation. Perhaps you are a beneficiary of a tax-deferred account and weren’t unaware that RMDs apply to you. The last couple of years have been incredibly confusing, thanks to several major legislative changes that affect RMD rules.
Or, perhaps you took a partial distribution in 2023, but not enough to satisfy the required minimum amount.
You can still meet your RMD obligation for 2023, but you must act now to make things right.
Read more: Required Minimum Distributions in 2023
Take the RMD ASAP
As soon as you’ve realized that you haven’t taken the RMD (or didn’t take ENOUGH of a distribution to satisfy the minimum), fix it immediately! Take the distribution from your tax-deferred retirement account without any additional taxes withheld.
According to the IRS, you must RECEIVE the RMD by December 31, which means that you’ll need to request it from your retirement account custodian as soon as possible.
Complete Form 5329—and appeal the excise tax
If you fail to take an RMD (or if you don’t take a large enough distribution), you will face a 25% excise tax on the amount that you did NOT receive.
That excise tax is reported to the IRS on Form 5329. You must use the form for the year of the missed RMD and NOT the current tax year (fortunately, the IRS website contains annual versions of Form 5329 going back to the mid-1970s).
Be careful in completing this form. Line 54 is not intuitive. You’ll want to indicate $0 and then write “RC” (for “reasonable cause”) to the left of line 54, along with the amount of RMD that you did not take. Do NOT complete line 54 as directed on the form. If you do, you’ll calculate the amount on which you will owe a penalty.
If you write $0, you are indicating that there is no shortfall in the RMD. You don’t want it treated as such—you want the penalty to be waived.
Accordingly, line 55 should also be $0.
File Form 5329
If you’ve caught your mistake before you file your taxes for the year, you can send in your completed Form 5329 and letter of request to the IRS with your regular Form 1040.
But, if you’ve long since filed your income taxes for the year in which you didn’t take your RMD, you’ll just need to send the completed Form 5329 and letter to the IRS at the address to which you’d normally send a paper Form 1040.
Write a Letter of Explanation
In any case, when you are ready to file the form, attach a letter to the IRS explaining what happened and requesting a waiver of the excise tax. The IRS is aware of how complex RMD rules are and is more likely than not to grant your request if you can show that you have made a good-faith effort to correct the error as soon as possible.
Your letter should be short and direct. Describe what happened (and why). Also, note that the RMD has since been fulfilled and that you are taking steps to avoid making the same error in future years.
One last piece of advice: do NOT prepay the penalty when you file Form 5329. You’re not required to do so, and if the IRS does grant your appeal and waives the penalty, it may take a long time to get your prepayment refunded.