The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Ohio is representative of a common inquiry involving required minimum distributions (RMDs). The advisor asked:
“What are the repercussions if a person fails to take an RMD when required?”
Highlights of Discussion
• The repercussions could be a hefty penalty for the would-be RMD recipient and potential plan disqualification if the RMD was due from a qualified retirement plan (e.g., a 401(k), profit sharing, money purchase pension or defined benefit plan, etc.). The guidance of a tax attorney or advisor should be sought.
• Generally, if a retirement account owner fails to take an RMD by the applicable deadline (i.e., by the RBD for the first RMD, or by December 31 for each subsequent years’ RMD), he or she will have “excess accumulation.”
• The penalty on "excess accumulation" is 50% of the amount that should have been taken (IRC Sec. 4974).
— EXAMPLE: Tom was required to take an RMD equal to $40,000 by Dec. 31, 2012, but he failed to do so. Consequently, he has an excess accumulation and will owe an excise tax of $20,000 (50% of the amount not taken). Tom would compute and report the "excess accumulation" penalty tax by using IRS Form 5329, which he would submit with his federal income tax return.
• Thankfully, if the failure to take the full RMD in a timely manner is due to a reasonable error, and the retirement account owner takes steps to remedy the situation (i.e., by taking the amount that should have been distributed), the IRS may waive the excess accumulations penalty tax. If your client believes he or she qualifies for this relief, the IRS instructs the individual to attach a statement to Form 5329 that explains why the RMD was not timely taken and the steps that have been taken to remedy the failure. The individual must then file Form 5329 as follows:
— Complete lines 50 and 51 as instructed.
— Enter “RC” and the amount the person wants waived in parentheses on the dotted line next to line 52.
— Subtract this amount from the total shortfall figured without regard to the waiver, and enter the result on line 52.
— Complete line 53 as instructed. The individual must pay any tax due that is reported on line 53.
— The IRS will review the information you provide and decide whether to grant your request for a waiver.
• For qualified retirement plans, failure to automatically distribute RMDs by the time they are due is a potential plan qualification failure (IRC Sec. 401(a)(9)). Fortunately, the IRS’s Employee Plans Compliance Resolution System contained in Revenue Procedure 2013-12 has a correction method for plans that miss making RMDs.
• Copies of Form 5329 and 2012 Instructions for Form 5329 can be found on the IRS website here.
Conclusion
The IRS takes RMDs seriously. Dire consequences may await those individuals and qualified retirement plans that fail to distribute them. RMDs are an important tax matter in which individuals should involve their tax advisors. Financial advisors who are aware of the importance of timely complying with the RMD rules are better able to support their clients.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
