The price for any error with RMDs is 50% of what’s missing, which may be tens of thousands of dollars, representing a significant amount of money. Now is the chance to make amends if you failed to make your RMD payment by December 31, 2022, paid the incorrect amount or learned you made a mistake in a prior year. The sooner you remedy it, the more probable it is that the IRS will waive the penalties, and your odds are strong, despite the agency’s reputation for severity.
2023 will see the implementation of new guidelines that might make the IRS less friendly. The starting age for RMDs is increasing to 73 this year and 75 in 2033, which means the government will be hungry for the lost cash. Even more importantly, if you report it immediately, the fine will be lowered to 25% or 10%.
The IRS does not publicly track the number of people who skip or make mistakes with their RMDs; financial planners and tax experts report that it frequently occurs enough and that the agency is fairly lenient in providing exceptions.
Katie St. Ores, a financial advisor and tax preparer in McMinnville, Oregon, believes the IRS has behaved charitably thus far because they recognize that the laws are difficult and that mistakes occur. St. Ores explains they realize people are getting older, so they’ve probably decided, let’s just allow it thus far.
However, the new penalties seem to prevent future waivers, especially in light of the 10% reduction for timely error correction. The IRS has previously emphasized getting a waiver on its website. However, new laws make it possible to lower the penalties. The IRS will likely focus on reduced fines instead of waivers.
The 50% penalty effectively scared people into withdrawing RMDs; thus, lessening the penalty might diminish the dread of more tax, resulting in more taxpayers failing to remove their RMDs, explains St. Ores. The IRS will likely collect more taxes overall due to the increased likelihood that more taxpayers will fail to withdraw their RMDs due to a lower penalty and misunderstanding over the existing necessary age.
What to do about previous errors
There are several ways to screw up your minimum distribution requirements. The amount you must pay is computed using a formula that multiplies the account balance of all your qualifying tax-deferred accounts by an age-related component.
When first withdrawals are made, they normally amount to around 4% of the account balance. You continue taking RMDs annually from the start date until the accounts are depleted (or you die). In the past, the minimum age was 70.5, then lowered to 72, and now it is increasing to 73.
The director of financial planning at Atlanta-based investment company Homrich Berg, Isaac Bradley, states that these matters can become complex.
Another simple issue is taking the incorrect amount due to a math error. People tend to have many 401(k)s at former workplaces or multiple rollover IRAs that have not been consolidated, so sometimes the issue is simply one of communication. It is possible that the advisor assisting with the computations is unaware of an account kept with a different custodian, which might throw off the entire calculation.
David Haas, president of Cereus Financial Advisors, has had to assist family members with RMD corrections, primarily involving inherited IRAs.
“You’re meant to take RMD for the deceased if they haven’t already,” he explains, “but in the chaos of sorrow, many people forget.” Then, after inheriting the account, you must take RMDs over ten years to empty it.
The initial stage is acknowledging your error, followed by the payment of the missing sum. You must file a specific form with the IRS for the relevant tax year (Form 5329), which you may submit at any time; you do not need to wait until you file your next tax return.
If you wish to request a waiver, you must provide a letter detailing the error. You will be penalized if your request is denied. Although the procedure is not overly hard, you may wish to consult a tax expert to ensure that you don’t make any errors when computing the missing amount. If you have skipped numerous years of filing, there may be substantial documentation to complete.
Kenneth Waltzer, a Los Angeles-based financial adviser, had a client who did not understand he had inherited an IRA and missed the required minimum distributions (RMDs) for five years. He disregarded correspondence about the matter, adds Waltzer. When he approached us, the total was over $100,000.
Katie St. Ores’s message will be: Do it correctly the first time. In the future, it may be difficult to obtain forgiveness.