50% Tax On Missed RMDs May Be Waived

Once clients reach age 70½, they are forced to begin taking required minimum distributions (RMD) from their retirement accounts. Generally, the withdrawal should occur by December 31 of the year in which they turn 70½. Clients must take RMDs from all employer-sponsored retirement plans: 403(b)s, 457(b)s, 401(k)s, traditional IRAs, SEPs, SIMPLE IRAs, SARSEPs, and Roth 401(k)s. If a client fails to make a timely withdrawal, they may face a penalty of up to a 50% tax on the funds left in the account that were part of the RMD. Planners with clients that find themselves in this position say their clients are usually shocked by the large penalty. Brian Stoner, a CPA, described the situation: “I usually get stunned silence, followed by ‘How much?’ Fortunately I only have to discuss it once. They never do it again!”

If a client does miss a RMD, there remains a possibility the tax penalty may be forgiven. According to the IRS, as long as a client can show there was “reasonable error and that reasonable steps are being taken to remedy the shortfall,” a waiver may be granted. Phyllis Jo Kubey, a CFP in New York, notes that the “key is to state that the missed RMD, or RMDs if there are multiple years involved, is due to reasonable cause, that the taxpayer has taken reasonable steps to correct the error and is set up for correct RMDs going forward.” Whatever the reason for the missed RMD, it is important for clients to act as quickly as possible to remedy the error. A single missed year is much simpler to correct than multiple years of missed RMDs.

See Jeff Stimpson, 50% Tax On Missed RMDs May Be Waived, Financial Advisor, August14, 2017.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.