Oops! What Happens If You Miss an Inherited IRA RMD? – Golden Years Investing

Inheriting an IRA can be a blessing, providing a valuable source of retirement income. However, along with the inheritance comes responsibility, particularly the requirement to take Required Minimum Distributions (RMDs). But what happens if you accidentally miss one? Don’t panic, but understand the consequences and the steps you need to take to rectify the situation.

The Sting of Missing an RMD: A Tax Penalty

The IRS doesn’t take missed RMDs lightly. If you fail to take your required distribution on time, you’ll face a hefty penalty: 25% of the amount you should have withdrawn.

That’s a significant chunk of change that you’d likely prefer to keep in your pocket. Imagine owing 25% on a $10,000 RMD – that’s a painful $2,500 penalty!

Understanding the RMD Rules for Inherited IRAs

Before we delve into solutions, let’s briefly recap the RMD rules for inherited IRAs. Keep in mind that these rules can be complex and depend on factors such as:

• The date of the original IRA owner’s death: This is crucial for determining the applicable RMD rules.
• The beneficiary’s relationship to the deceased: Spouses, children, and non-designated beneficiaries are treated differently.
• Whether the original owner had already started taking RMDs: This also influences the calculation.

Generally, non-spouse beneficiaries must follow one of two methods for taking RMDs:

• The 10-Year Rule: This applies if the original IRA owner died after December 31, 2019. You have 10 years to withdraw the entire inherited IRA, but there are no required annual withdrawals in years 1-9. The entire account must be emptied by the end of the 10th year.
• The “Stretch” IRA Rule (Phased Out): This rule allowed beneficiaries to take distributions based on their life expectancy. This typically applies if the IRA owner died before January 1, 2020.

What To Do If You Missed an RMD

Don’t despair! Here’s a step-by-step approach to take if you’ve missed an inherited IRA RMD:

1. Withdraw the Missed Amount Immediately: This is the first and most crucial step. Calculate the exact amount you were supposed to withdraw and take that distribution as soon as possible. Even if it’s past the deadline, taking the distribution demonstrates your intention to correct the error.

2. File Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts: You’ll need to file this form with your tax return for the year you missed the RMD. This is where you report the missed RMD and calculate the penalty.

3. Request a Waiver of the Penalty: This is where you plead your case to the IRS. On Form 5329, you can explain why you missed the RMD. Common reasons for granting a waiver include:

   • Reasonable Error: You genuinely misunderstood the rules or made a good-faith mistake.
   • Extenuating Circumstances: Significant life events, such as illness, disability, or a death in the family, prevented you from taking the distribution.
   • You are Taking Corrective Action: Emphasize that you’ve taken steps to rectify the situation by withdrawing the missed amount.

   Be clear, concise, and honest in your explanation. Include any supporting documentation that strengthens your case.

4. Pay the Penalty (Initially): Even if you’re requesting a waiver, it’s generally recommended to pay the penalty initially. This shows the IRS that you’re taking the matter seriously. If your waiver is approved, the IRS will refund the penalty.

Tips to Avoid Missing Future RMDs

Prevention is always better than cure. Here are some tips to help you avoid missing RMDs in the future:

• Understand the Rules: Thoroughly research the RMD rules that apply to your specific inherited IRA situation. Consider consulting with a financial advisor or tax professional.
• Set Reminders: Mark your calendar well in advance of the RMD deadline (usually December 31st, but consult a tax professional or the IRS to confirm). Set multiple reminders to give yourself ample time.
• Automate Distributions: If possible, arrange for your financial institution to automatically calculate and distribute your RMD each year.
• Review Annually: Review your RMD requirements each year to account for any changes in the law or your financial situation.
• Consult with a Professional: Working with a qualified financial advisor or tax professional can help you navigate the complexities of inherited IRAs and ensure you’re in compliance with all the rules.

The Bottom Line

Missing an inherited IRA RMD is a serious matter that can result in a hefty penalty. However, by taking swift action and demonstrating a genuine effort to correct the error, you may be able to get the penalty waived. Most importantly, take steps to prevent future missed RMDs by understanding the rules, setting reminders, and seeking professional guidance. Remember, a little planning can go a long way in preserving your inherited wealth.

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