Not Enough RMD
Participants must take an Required Minimum Distribution (RMD) from retirement plans and IRAs. 403(b) plans often have more than one account in the name of each participant. While each 401(k) plan must issue its own RMDs, an individual can take one RMD distribution for the entire amount computed using the balances in several 403(b) accounts in that participant’s name. However, 403(b) plan participants often fall short of their required minimum because they fail to add all their balances in the 403(b) plan when computing their RMD. Unfortunately, the inadvertent shortfall is subject to a penalty.
The current 50% tax assessed for failure to take the required RMD is one of the highest penalties in the Internal Revenue Code and it is assessed on what is often an honest mistake, so SECURE 2.0 reduced the penalty to 25% effective in 2023. In addition, the penalty drops down to 10% if the participant takes the necessary RMD by the end of the second year following the year it was due.
To ask for a penalty waiver, the participant can attach a statement of reasonable cause to Form 5329 in conjunction with an individual income tax return filing. In the past, the IRS has been generous in granting penalty waivers. Needless to say, tax preparers hope the penalty waivers will not be discontinued in light of the reduced penalties. Time will tell.
Too much RMD
Timing is everything. SECURE 2.0 increased the RMD age to 73 from 72 effective 2023, but the Act was passed so late in 2022 that financial institutions had already sent RMD notices to individuals who would turn 72 during 2023. By April 28, financial institutions that sent out incorrect RMD notices were required to notify people scheduled to turn 72 in 2023 that no RMD is due for 2023. Additionally, they were required to correct any 5498 forms that incorrectly had the RMD box checked.
Procrastination is not a way of life for some retirees. For some people, DUE April 15, 2024, means DO it now, and for others, it means DO it April 15, 2024. Overzealous individuals who acted on the erroneous RMD notice immediately took a distribution that they were not required to take until April 1, 2025, the year after they turn 73. As a result, the distribution is not an RMD, so it may be able to be rolled over within 60 days, if the distribution came from a retirement plan. If it was an IRA distribution, then the participant can roll it over to another IRA if it doesn’t violate the one-rollover-per-year maximum. If the person has already completed an IRA-to-IRA rollover in the past 365 days, then the distribution would be taxable, so then it makes sense to convert it to a Roth IRA. The once-per-year IRA rollover rule doesn’t apply to Roth conversions since a conversion is a rollover from an IRA to a Roth IRA, not an IRA-to-IRA rollover.
If more than 60 days have passed since the date of the distribution from either a retirement plan or an IRA, the IRS may waive the 60-day rollover requirement since the missed deadline resulted from circumstances beyond the participant’s control. See the following IRS web page for instructions to request the waiver:
Alternatively, the participant may just need to accept the fact that they have a little extra cash and make good use of it: take an extra vacation, buy a new car, or a boat, or all of the above, depending on the size of the distribution. Choosing what to do with extra money is a good problem to have.
Just enough RMD
The specifics of the RMD computation are beyond the scope of this article. To avoid unexpected penalties, rollovers, deadline waiver requests, or unexpected extra cash, retirees should collaborate with their tax preparers and financial advisors to ensure that their RMD is just enough. When it comes to RMDs, just enough is good enough.
