There's no denying the tax benefits of funding a retirement account, but our 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 fulfill the deadline of 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.)

Paying 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.) On the 2004 version of IRS Form 5329, for example, the excise tax is reported in Part Vlll. The step-by-step instructions will help you to figure out the excise tax owed:

Figure 1 - Part VIII of Form 5329

The amount determined in Section VIII of IRS Form 5329 is reported on line 59 of the 2004 version of IRS Form 1040.

Figure 2 - "Other Taxes" Section of Form 1040

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 (Form 1040). 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 year and "Form 5329".

Requesting 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. However, you must still file Form 5329, pay the taxes upfront and take the necessary steps to withdraw the RMD shortfall. The request for waiver may be included in a letter of explanation, which you attach to your tax return (Form 1040). If the IRS approves your request, the amount of the excise tax that you paid will be returned to you. 

Automatic Waiver of the Excise Tax
If you are a beneficiary named by a retirement-account 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 Dec 31 of the year following the year in which the owner of the retirement account died. You must also withdraw an RMD amount by Dec 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 Dec 31 of the fifth year following the year the retirement-account owner died. Let's look at the following example: 

Example In 2004, 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:  John can distribute the assets over his single life expectancy. For most IRA plan documents this is the default option, which is subject to the provisions of RMD regulations. John can distribute the assets by Dec 31 of the fifth year following the year Ron died. John chooses the life-expectancy option. The RMD for 2005 is $10,000, but John fails to withdraw any amount by Dec 31, 2005. 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 Dec 31, 2009, the fifth 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.

Conclusion
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 withdrawal 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.

by Denise Appleby (Contact Author | Biography)

Denise Appleby is a retirement plans consultant, freelance writer and editor. Before starting her own business, Appleby Retirement Consulting, Denise worked for Pershing LLC for almost 10 years. While at Pershing, Denise rose to the rank of vice president, and held many positions including retirement plans product manager, manager of the retirement plans technical assistance group and retirement plans training manager. Appleby Retirement Consulting provides technical assistance to financial institutions and financial professionals; content for newsletters, websites and magazines; and technical editing services for books and other retirement plans material. Denise holds several retirement professional designations.