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How to Fix a Required Minimum Distribution Mistake

Required minimum distributions are complicated. It’s easy to slip up and make a mistake when trying to understand the rules around required minimum distributions.

Luckily, if you do make a mistake, there are steps you can take to remedy the issue and avoid a harsh penalty.

What is a required minimum distribution?

A required minimum distribution is the amount that you are required to withdraw, based on your age, from your retirement account.

If you have a tax-deferred retirement plan, like a traditional IRA or 401(k), you are required to take distributions once you reach a given age. That withdrawn money is then taxed at your current tax rate.

At what age are you required to make minimum distributions?

Depending on when you turned 70.5 the timeframe for required minimum distributions shifts.

  • If you were 70.5 before the end of 2019, you had to begin taking required minimum distributions in April of the year after you turned 70.
  • If you were not 70.5 by the end of 2019, you can wait until you are 72.

What happens if you miss a required minimum distribution withdrawal?

It’s important to regularly make your withdrawals so as to avoid a stiff penalty. Should you miss a withdrawal you will be made to pay a 50% excise tax on the amount you were supposed to withdrawal. You will also be subject to this tax if you take less than the required minimum distribution amount.

What steps should I take if I miss a withdrawal?

Time is of the essence! It’s important to work to address the mistake as soon as you notice. The first step is to take the correct distribution amount. If you missed more than one distribution, either over different years or accounts in the same year, it’s better to take each distribution individually instead of in one bulk sum. Be sure to take exactly the amount that you are short – not more.

The next step is to file an IRS form 5329. If you missed multiple withdrawals, they can be included on the same form. If the missed withdrawals span multiple years you will need a separate form for each year.

These forms can be tricky so it’s important to take the time to closely follow the instructions.

What if my spouse and I both missed a required minimum distribution withdrawal?

Married couples who both miss a withdrawal must both, separately, fill out the IRS 5329 form.

Finally, after completing the 5329 form, you should submit a letter to the IRS. This letter should include:

  • An explanation as to why you missed the distribution.
  • The steps you took to remedy the mistake.

Will the IRS waive the excise tax?

There is no clear guideline for who they do or do not waive the excise tax. If they do, they will send you notice.

To avoid penalty ensure that you make your required minimum distributions in a timely manner. Doing so will prevent you from having to pay a hefty excise tax. Should you forget to make a withdrawal, it’s possible to remedy the mistake. Doing so in a timely manner may even help in having your excise tax waived.