Navigating Missed RMDs: A Step-By-Step Approach

Fixing a Missed RMD in 5 Easy Steps

Required Minimum Distributions (RMDs) are mandatory withdrawals you must take from your Individual Retirement Accounts (IRAs) under certain conditions. Depending on your birth year, the age at which you need to start taking these distributions varies:

• Age 72 (or 70 ½): Born 1950 or earlier

• Age 73: Born 1951 – 1959

• Age 75: Born 1960 or later

For non-spouse Roth IRAs, eligible beneficiaries must start taking distributions in the year following the account holder's death. If you miss an RMD, a significant penalty of 25% of the amount not withdrawn each year is applied. However, if you address this early, you can reduce the penalty to 10%.

Identifying a Missed RMD

It's crucial to keep track of your RMDs yearly once you come of age or if you inherit an IRA as an eligible designated non-spouse beneficiary. This is particularly important for accounts where the owner has died after reaching their required beginning date. Consulting a financial advisor to verify your calculations can help prevent overlooked RMDs.

1. Look at the Balance Sheet

The first step is to review the previous year's ending balance of your IRA for any periods when RMDs weren't fulfilled. Note that in 2020, RMDs were temporarily waived due to federal regulations.

2. Determine the Life Expectancy Factor

To address missed RMDs, determine the life expectancy factor correlated with your age each year using the Uniform Lifetime Table for IRA holders. If you're a non-spouse beneficiary who inherited an IRA before 2019, use your age at inheritance and refer to the Single Life Expectancy Table, subtracting one each subsequent year. Post-2019 inheritance by non-spouse eligible designated beneficiaries follows the same approach. Different calculations apply to spouse beneficiaries.

3. Do Some Simple Math

Once you have the life expectancy factor for each missed year, divide the IRA’s balance by this number to calculate the amount required for withdrawal.

4. Important Forms to File

Submit IRS Form 5329 for every year an RMD was missed. This form reports the missed distributions and any penalties incurred. If you have a valid reason for missing the RMD, attach a statement with the form explaining the oversight, confirming the issue has been corrected, and outlining measures in place to prevent recurrence.

5. It Will Never Happen Again

To avoid future incidents, establish sound withdrawal procedures. Many financial custodians offer the possibility of automatic RMD distributions each year. Utilizing such a system can aid those who tend to forget these mandatory withdrawals.

By following these steps, you can effectively navigate the complex landscape of Required Minimum Distributions (RMDs), avoid penalties, and ensure compliance. Proactive management and regular updates on regulations are essential for managing your retirement funds wisely.