How to Get The 50% Tax Penalty For Failing to Take RMD’s From Your IRA Waived
Nobody enjoys paying taxes. But you have to pay them and the money from your IRA is no exception! If you didn’t take the Required Minimum Distributions (RMD’s) from your IRA, then you will be hit with a whopping 50% penalty.
The penalty is 50% on the amount you should have distributed from your IRA to yourself. This penalty really sucks because It’s basically a penalty for simply not paying yourself from your own IRA. Oh, the irony.
Have you been subjected to the 50% penalty? There’s some good news for you below.
How to get that 50% Penalty Tax Waived & Your Pockets Saved.
In the event that you failed to take RMD for your IRA, you may be able to get a waiver for the penalty if you admit the mistake to the IRS by filing IRS form 5329. (Yep, more paperwork!)
2 Steps You Need to Take. (Get ready to write!)
#1 Complete Section IX of Form 5329. You need to say what you should have taken as RMD and then you figure out the penalty tax due. You then write the letters “RC” next to the dollar amount you want waived on line 52.
#2 Statement of Explanation. Attach a Statement of Explanation outlining two items.
The first thing you need to explain is the “reasonable error” that caused you not to take RMD. The IRS does not provide a definition or acceptable examples of “reasonable error”. However, my a friend of mine who works at the IRS told me the IRS does recognize reasonable errors and oversights in most situations where there is reason for the error.
This would include situations from mental health, being lucky enough to reach the age of 70 ½ years, to being new to RMD, to relying on bad advice from an advisor, custodian or accountant. Sometimes the IRS can be reasonable!
The second thing you need to explain is the reasonable steps you took (or plan on taking) to correct the error. Hopefully by the time you’re filing the exemption request you would’ve already contacted your IRA custodian. This way you can take the late RMD so that by the time you submit the RMD penalty tax waiver, you would be caught up and would have already remedied the error.
This makes for an easy and clean explanation of what steps you’re going to take as your explanation will be that you already corrected the RMD failure once you realized the error.
Keep in mind that RMD failures won’t go away, the IRS never forgets! Sooner or later you’ll start getting collection letters from the IRS requesting the 50% penalty tax. You should correct your RMD failure and request the wavier as soon as you become aware of it. Especially if you have an inherited Roth IRA, as those withdrawals could’ve been tax free! Don’t get played by the tax game, play it instead, and win!