There's no denying the tax benefits of funding a retirement account, one of which is the compound effect of tax-deferred growth. But your money can't avoid the IRS forever. That's why owners and beneficiaries of Traditional, SEP and SIMPLE IRAs, qualified plans, and 403(b) accounts must meet the deadline of taking their required minimum distribution (RMD).

Failing to withdraw your RMD by the applicable deadline may result in you owing the IRS an excise tax of 50% of the RMD shortfall. If for any reason you miss your deadline, there are some steps you must take. (If you'd like to read about what RMD rules are and how to comply with them, see Tis The Season For Required Minimum Distributions and Avoiding RMD Pitfalls.)

Step 1: Pay the Excise Tax
The excise tax owed must be reported on IRS Form 5329 and IRS Form 1040 (your income tax return). (You can find these forms on the IRS website.) The step-by-step instructions will help you to figure out the excise tax owed:

It's important to make sure you use the correct version of Form 1040. If you are required to file Form 5329, then you are not eligible to use Form 1040-A or 1040-EZ. Instead, you must use Form 1040. Generally, Form 5329 is attached to your tax return. However, if by meeting certain exceptions you are not required to file a tax return (as explained in the instructions for filing Form 1040), you must file Form 5329 by itself and pay the excise tax owed. Be sure to complete the form with the requested information and enclose your check or money order made payable to United States Treasury. On the check write your Social Security number, the current tax year and "Form 5329". (For tips on how to avoid an excise tax, see Tax-Saving Advice For IRA Holders.)

Step 2. Request a Waiver
If you feel that you missed the deadline due to a reasonable cause, you may ask the IRS to waive the 50% excise tax. The request for waiver may be included in a letter of explanation, which you attach to your tax return (Form 1040) along with your Form 5329. When requesting a waiver, do not pay the excess accumulation penalty up front. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, you will be notified.

Step 3: Withdraw the Full Balance
If you are a beneficiary who inherited a retirement-account from an owner who died before his or her required beginning date (RBD) and you are required to distribute the assets over your life expectancy, you must begin withdrawing RMD amounts by December 31 of the year following the year in which the owner of the retirement account died. You must also withdraw an RMD amount by December 31 of each subsequent year.

While the excise penalty will generally apply if you did not withdraw the RMD amount on time, the penalty may be waived if you switch to the five-year rule and withdraw the full balance of the account by December 31 of the fifth year following the year the retirement-account owner died. Let's look at the following example:

In 2012, John inherited an IRA from his brother Ron who died at age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:
  1. John can distribute the assets over his single life expectancy. For most IRA plan documents this is the default option, and is consistent with the provisions of RMD regulations.
    • John can distribute the assets by December 31 of the fifth year following the year Ron died.

John chooses the life-expectancy option. The RMD for 2013 is $10,000, but John fails to withdraw any amount by December 31, 2013. If John wants to continue using the life-expectancy method, he will have to pay the IRS an excise tax of $5,000 and must file Form 5329. He may request a waiver if he feels the failure is due to a reasonable cause. John, however, will receive an automatic waiver of the penalty if he withdraws the account balance by December 31, 2017, the fifth RMD-year following the year Ron died.

It may not be practical to switch to the five-year rule solely because you missed the RMD deadline. Consult with a competent financial professional to determine whether it is more financially sound for you to pay the excise tax so that you continue enjoying tax-deferred growth (or tax-free growth in the case of a Roth IRA) or to accept the waiver and distribute the assets within the five-year period. (For information about the benefits of the benefits of continued tax-deferred growth, see the article Stretch Your IRA.)

Missing your RMD deadline can be a frustrating and costly mistake. To ensure it does not happen, take the necessary steps to make sure your distribution occurs by the applicable deadline. This includes making arrangements with your custodian for systematic or automatic withdrawals to occur on a predetermined date. Submit your withdrawal requests at least two months before the deadline and check your statements to ensure the correct amount was distributed from your account. Submitting your requests early allows sufficient time for any necessary adjustments. Talk to your financial institution about other ways it can help you to satisfy your RMD requirements.

Related Articles
  1. Taxes

    Preparing For Retirement Plan RMD Season

    Paying taxes is inevitable - that's why you need to learn about the rules for required minimum distributions.
  2. Taxes

    Distribution Rules For Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  3. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  4. Budgeting

    Managing Income During Retirement

    Learn some sensible strategies for making your hard-earned savings last for as long as you need them.
  5. Taxes

    6 Important Retirement Plan RMD Rules

    Paying taxes is inevitable - that's why you need to learn about the rules for required minimum distributions.
  6. Term

    Understanding Total Returns

    Total return measures the rate of return earned from an investment over a period of time.
  7. Term

    What are Pension Funds?

    A pension fund is a company-sponsored fund that provides income for employees in retirement.
  8. Investing Basics

    Understanding How Dividends Are Taxed

    Learn how dividends are taxed by the IRS, and understand the different types of dividend income as well as the capital gains tax rates.
  9. Investing Basics

    6 Reasons Why Dividends Should Be Reinvested

    Learn about the advantages of dividend reinvestment programs and how they may benefit longer-term investors who want to build a position in a company.
  10. Retirement

    Retirement Planning for Entrepreneurs and Small Businesses

    If your business has receiveables, here's a smart way to leverage them to build up your retirement fund fast.
  1. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  2. Wealth Management

    A high-level professional service that combines financial/investment ...
  3. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  4. Backdoor Roth IRA

    A method that taxpayers can use to place retirement savings in ...
  5. Current Service Benefit

    The amount of pension benefit accrued by an employee who had ...
  6. Self Invested Personal Pension ...

    A tax-efficient retirement savings account available in Great ...
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  4. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
  5. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>
  6. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!