Why You Should Take Your RMD

You are 70 ½ or older this year so you have a required minimum distribution (RMD). But, you don’t need the money or you don’t want to increase your income and pay more in income tax so you don’t want to take your RMD. What happens if you just ignore your RMD and do not take it?

Let’s be absolutely clear. Only bad things happen when you do not take your RMD. You won’t go to jail, but bad things will happen.

First of all, there is a penalty for not taking all or part of an RMD and it’s a big one. The penalty is 50% of the amount of the RMD not taken. If you did not take a $30,000 RMD, the penalty is $15,000 (50% of $30,000).

Secondly, you are required to tell IRS that you did not take your RMD. You do this on IRS Form 5329 which should be filed with your income tax return for the year. Unlike other tax forms, this form has its own signature line. That means that the form can be filed on its own and it is considered a tax return. When you do not file a return the IRS does not have the opportunity to determine if you have paid all your taxes due for the year. The result of all of this is that the statute of limitations does not start to run on the 50% penalty. IRS can assess the penalty, plus interest, and failure to file penalties, plus interest, and, if the amount is large enough, accuracy related penalties, plus interest, at any time in the future. Do you still think it is worth it to ignore your RMD?

Finally, when you miss an RMD the problem does not go away after your death. Your beneficiaries inherit your IRA and they inherit all of the issues that go along with a missed RMD.

If you accidentally miss an RMD, the result is a little bit different. IRS can waive the 50% penalty for good cause. The missed RMD should be taken as soon as the problem is discovered. You still have to file Form 5329 and report the missed RMD. The instructions for the form tell you how to request a waiver of the penalty.

The payment of the RMD is entirely the responsibility of the IRA owner. When the correct amount is not paid out, the penalty will be owed by the IRA owner. It makes no difference whose fault it was that you did not take the correct amount. It is always the IRA owner who ends up reporting and paying the penalty. This is the time of year to double check your RMD calculations and to make sure that your full RMD is paid out to you before year end.