RMD Penalties

If you don’t take Required Minimum Distributions, you might get hit with an incredible 50% penalty. That’s almost half!

The 50% penalty is applied to any distribution you were supposed to take from your IRA. We’re going to need a philosopher to justify this one. “But you see, your income exists…in potentiality.” Well, your tax penalty exists
in actuality and it is a big one.

If you’ve been hit with a 50% penalty don’t panic. You may be able to get a waiver for the penalty if you admit the mistake to the IRS by filing a 5329. Come clean. Throw yourself at the mercy of the court.

The bad news is, there is a lot more paperwork.

FIRST, you complete section IX of form 5329. You need to state what your distribution should have been and calculate the penalty tax. You have to right the letters “RC” next to the dollar amount you want waived on line 52.

You still with me? If you can’t listen to money matters you’re going to have a hard time handling your money matters? You need to wake up soldier.

You’re going to have to write a Statement of Explanation that outlines two things:

You need to explain what makes your error “reasonable”. Mental health issues or bad advice from a bad advisor usually qualify. Maybe you’re just new to RMD’s. The IRS is, at times, capable of compassion.

The next thing you need to provide is the step-by-step process you are planning to take, or have taken, to correct the error. If you’re on top of things, you’ve already taken the missed RMD. This makes everything clean, from your explanation for the error, to the enemy’s acceptance of your reasonable explanation.

Keep in mind that RMD failures don’t disappear. The IRS is a relentless, greedy machine. They will get their money. Get your error corrected. Also keep in mind that with an inherited Roth IRA, these withdrawals could be tax-free.

Beating the IRS at their own game is one of our favorite pastimes here at Money Matters. Thanks for tuning in.

 

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