{"id":22668,"date":"2023-09-27T16:25:47","date_gmt":"2023-09-27T16:25:47","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/retirement\/penalty-for-missed-rmds-is-reduced-why-you-should-care\/"},"modified":"2023-09-27T16:25:48","modified_gmt":"2023-09-27T16:25:48","slug":"penalty-for-missed-rmds-is-reduced-why-you-should-care","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=22668","title":{"rendered":"Penalty For Missed RMDs Is Reduced; Why You Should Care"},"content":{"rendered":"
\n

If you have been following my posts on required minimum distributions from retirement accounts over the last few years, I have an important update to share with you.<\/p>\n

RMDs are mandated IRA distributions that start at a certain age (currently age 73) \u2013 or any age for those who inherited IRAs or other tax-deferred retirement accounts. Missing all or part of an RMD is costly, due to a steep penalty (excise tax).<\/p>\n

Now that new legislation effective in 2023 reduced the penalty by one-half, should you care?<\/p>\n

Congress Acts On Excise Tax<\/h2>\n

Under the SECURE 2.0 Act, which was signed into law in December of 2022, the penalty for an RMD that has been missed or not fully taken has been reduced from 50% to 25%, and \u201cpossibly 10% if the RMD is timely corrected within two years,\u201d quoting the IRS website page \u201cRetirement Plan and IRA Required Minimum Distributions FAQs.\u201d<\/p>\n

Why the Change<\/h2>\n

What is the reason behind the change?<\/p>\n

<\/fbs-ad><\/p>\n

A report from the House of Representatives\u2019 Committee on Ways and Means offers some insight.<\/p>\n

Released on March 29, 2022, nine months before the passage of the SECURE 2.0 Act, the report noted that the committee recognized that \u201cin many cases, failures to take a required minimum distribution are inadvertent. The Committee thus wishes to reduce the overall excise tax that applies to such failures, in particular in the case of an individual who discovers such a failure and takes steps to correct it.\u201d<\/p>\n

An Example<\/h2>\n

Let\u2019s look at how the penalty change works. I\u2019ll give you an example with this warning: Be absolutely sure to consult your tax adviser before taking any action.<\/p>\n

\u201cSimon,\u201d age 80, forgets to take his $50,000 RMD for 2023 by the due date (Dec. 31, 2023).<\/p>\n

Before 2023, he would have been assessed a penalty of 50% on the amount of the RMD not taken \u2013 in this case, $25,000.<\/p>\n

Starting this year (2023), the penalty is 25%, bringing Simon\u2019s penalty to $12,500. And if Simon realizes his error in, say, January 2024 and takes steps to correct it by immediately taking his RMD, the penalty could be as low as $5,000 (a 10% penalty).<\/p>\n

The key is that Simon takes his RMD as soon as he realizes the error has occurred. Once he does, he needs to file Form 5329, \u201cAdditional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,\u201d to report the retirement account\u2019s \u201cexcess accumulation\u201d in Part IX, along with the penalty amount.<\/p>\n

Waiver Request<\/h2>\n

Simon also has the option in Form 5329 to request a waiver of the penalty due to \u201creasonable cause.\u201d \u201cThe IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall,\u201d quoting the Form 5329 instructions for reasonable cause.<\/p>\n

To seek the waiver, Simon would fill out line 52 of Form 5329, the minimum required distribution for the year (in this case, $50,000) and line 53, the amount actually distributed (zero).<\/p>\n

For line 54, the Form 5329 instructions state \u201cEnter \u2018RC\u2019 and the amount of the shortfall you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 54.\u201d In this case, that would be RC and $50,000 in parentheses next to line 54 and zero in the blank for line 54.<\/p>\n

Line 55 calls for the additional tax on the missed RMD.<\/p>\n

If Simon requests a waiver, he will attach a letter explaining his reasons. If the IRS approves the request, Simon could get a waiver of the penalty, which means he would owe nothing.<\/p>\n

Note that the version of Form 5329 for the 2023 tax year, the first involving the new 25% penalty, is not out yet, according to an IRS spokesperson, who added that it’s possible the reporting procedure for missed RMDs could be modified.<\/p>\n

Should You Care About the Change?<\/h2>\n

The change in penalties might make you feel less careful about timely taking your RMDs, but that would be a mistake.<\/p>\n

Mark Luscombe, principal tax analyst at Wolters Kluwer, offered this advice: \u201cWhile the change is a significant reduction in the potential penalty for failure to take a required RMD, a 25% penalty, or even a 10% penalty, is still very significant and should not alter, I would think, someone\u2019s approach to taking RMDs.\u201d<\/p>\n

Or, if you are thinking you\u2019ll just get a waiver of the penalty, not so fast.<\/p>\n

\u201cThere was some concern that, with a lower penalty, the IRS might be less willing to waive penalties,\u201d Luscombe explained. \u201cHowever, in updating its frequently asked questions on required minimum distributions, the IRS left the waiver of penalty question, question 9, intact, indicating that the IRS probably plans to continue its waiver program in a manner similar to what was done in the past.\u201d<\/p>\n

Consult Your Tax Adviser<\/h2>\n

What are tax advisers thinking? The reduction in the excise tax \u201cis certainly on my mind as we begin addressing our clients\u2019 2023 income tax filings and planning,\u201d said Jo Anna M. Fellon, a CPA and the National Leader of Private Client Services at Marcum LLP, a national accounting and advisory services firm.<\/p>\n

This is just another one of those important regulatory changes that keeps CPAs, tax lawyers, and investment advisers on their toes. The most important takeaways are these:<\/p>\n

First, don\u2019t assume you already know the rules. RMD rules seem to be ever-changing.<\/p>\n

Second, always check with your tax adviser when dealing with a failed or insufficient RMD. Tax advice is always unique to the individual.<\/p>\n

Third, don\u2019t delay.<\/p>\n

Questions?<\/h2>\n

To keep up with topics that I cover, be sure to follow<\/em> me on the forbes.com site (and if you would like to subscribe<\/em>, check out the red box at the top right). Write to me at forbes@juliejason.com. Include your city and state, and mention that you are a forbes.com reader. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future post.<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

If you have been following my posts on required minimum distributions from retirement accounts over the last few years, I have an important update to share with you. RMDs are mandated IRA distributions that start at a certain age (currently age 73) \u2013 or any age for those who inherited IRAs or other tax-deferred retirement<\/p>\n","protected":false},"author":1,"featured_media":22669,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[55],"tags":[],"class_list":{"0":"post-22668","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-retirement"},"yoast_head":"\nPenalty For Missed RMDs Is Reduced; Why You Should Care | iSafeSpend<\/title>\n<meta name=\"description\" content=\"If you have been following my posts on required minimum distributions from retirement accounts over the last few years, I have an important update to\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/isafespend.com\/?p=22668\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Penalty For Missed RMDs Is Reduced; 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