Retirement Income Strategist at Self Directed Retirement Plans LLC
Answered a year ago
The worst-case scenario for not taking your Required Minimum Distribution (RMD) is a significant tax penalty from the IRS. If you fail to withdraw the full amount of your RMD by the deadline, the IRS imposes a penalty of 25% on the amount not withdrawn. For example, if your RMD was $10,000 and you didn't take it, you could owe a $2,500 penalty—on top of regular income tax owed on the distribution. The consequences for missing your RMD can be harsh, especially for retirees on a fixed income," says a retirement planning expert. "The penalty used to be 50%, and although it's been reduced to 25%—or even 10% if corrected in a timely manner—it's still an unnecessary hit to a retirement portfolio that could have been avoided. RMDs are mandatory withdrawals from traditional IRAs and certain employer-sponsored retirement plans starting at age 73 (or age 72 if you turned 72 before Jan. 1, 2023). The IRS uses a life expectancy formula to calculate how much you must withdraw each year, and missing that withdrawal doesn't go unnoticed. What to Do If You Missed Your RMD: 1. Act Quickly to Correct It Take the missed distribution as soon as possible. The IRS may reduce the penalty to 10% if the error is corrected in a timely manner and a formal explanation is submitted. 2.File IRS Form 5329 Use this form to report the missed RMD and request a waiver of the penalty. Include a statement explaining the reason for the oversight and how you've taken corrective action. 3. Work With a Financial Advisor or CPA Navigating RMD rules can be complex. A qualified professional can help you avoid future mistakes, handle any tax implications, and implement a more reliable withdrawal strategy. Proactive planning and timely action are key to avoiding penalties and ensuring your retirement assets continue to work in your favor.
As a long-time estate planning attorney with a CPA background from my Deloitte days, I can tell you that failing to take your RMD is one of the most expensive tax mistakes you can make. The penalty is severe - 50% of the amount you should have taken but didn't. That's not a typo - 50%. I've seen clients face five-figure penalties simply because they missed this requirement. If you've missed taking an RMD, act immediately. File Form 5329 with the IRS and include a letter explaining why you missed the distribution (illness, misunderstanding, poor advice). The IRS has been surprisingly reasonable about waiving penalties when taxpayers show good faith and promptly correct the error. I often recommend setting up automatic RMDs with your financial institution to prevent this issue. In one case, I helped a client whose spouse had passed away make up several years of missed RMDs by filing proper documentation and demonstrating reasonable cause - we got all penalties waived. For those who inherit IRAs, the rules become even more complex. I've found that making a trust the beneficiary of your IRA can provide both tax deferral and asset protection benefits. This approach helps ensure RMDs are properly managed while protecting the inheritance from creditors - a strategy I've implemented successfully for many clients concerned about their beneficiaries' financial future.
As a CPA with 40 years of experience and a former Series 6 and 7 Investment Advisor, I've seen the painful consequences of missed RMDs. The worst that could happen? A 25% excise tax on the amount not withdrawn - one of the steepest penalties in our tax code. I recently had a client who overlooked a $40,000 RMD and faced a $10,000 penalty. If you've missed your RMD, immediately take the distribution you should have taken. Then file Form 5329 to report the missed distribution and request a penalty waiver by attaching a letter explaining why the failure was due to reasonable error and that you've taken steps to remedy it. The IRS can be forgiving if you show the mistake was unintentional. I helped a client in her 80s who forgot her RMD due to health issues - we quickly withdrew the funds, filed the proper paperwork with a detailed explanation, and the IRS waived the entire penalty. The key is addressing it promptly rather than hoping it goes unnoticed. Set up automatic distributions with your financial institution to avoid future issues. Most custodians offer RMD calculation and automatic distribution services that can save you from these headaches and expensive penalties.
"What's the worst that could happen if you don't take your RMD? You get hit with a penalty so steep it feels like a punishment, not a tax. The IRS used to take 50% of the amount you should have withdrawn. Even after recent changes, it's still 25%, possibly reduced to 10% if you fix the mistake fast enough. That's not a slap on the wrist. That's a fine for forgetting your own money. And trust me, I've seen retirees who thought their custodian would remind them, only to find out—too late—that the responsibility is all on them." "If you've missed your RMD, the first thing to do is take it immediately. Then file Form 5329 to ask for a penalty waiver. Be honest and be fast. I've helped clients clean this up before the IRS even blinked. But delay it, ignore it, or pretend it's no big deal—and that mistake becomes very expensive."
While I'm a personal injury attorney rather than a CPA, I've seen the devastating financial impacts when clients mismanage retirement funds during difficult times after accidents. The worst consequence of missing an RMD isn't just the tax penalty - it's potentially destabilizing your entire financial recovery plan during a period when you're already vulnerable. In my practice, I've worked with clients who, while dealing with serious injuries, neglected financial obligations like RMDs and faced compounding financial hardships. This created additional stress during their recovery period that could have been avoided with proper planning. If you've missed your RMD, consider consulting with both a tax professional and your personal injury attorney if your situation involves settlement funds. At Barzakay Law Firm, we coordinate with financial experts to ensure our clients' settlements are structured to address both immediate needs and long-term obligations like RMDs. Setting calendar reminders with multiple alerts is a practical step anyone can take. Our most successful clients maintain a dedicated financial calendar separate from their medical appointment schedule to ensure financial deadlines don't get lost in the shuffle of recovery-related commitments.
Finding the right CPA or financial advisor for a quote can really make your article shine. You’ll want someone who not only knows the ins and outs of required minimum distributions (RMDs) but can also explain them in a way that’s both clear and engaging for your readers. Personally, I’ve found that LinkedIn and professional financial organizations have been goldmines for connecting with knowledgeable professionals who are often willing to share their expertise. Once you've found a few potential experts, reaching out with a concise, respectful email works best. Introduce yourself, explain the purpose of your article, and be clear about what you're asking them. If they need a push, maybe hint that featuring in an Investopedia article is a nice feather in their cap! For those readers that might've missed their RMD, make sure your expert stresses the importance of acting quickly to minimize penalties — and oh boy, those penalties can be steep, nearly 50% of what should have been withdrawn. Ending your conversation with such actionable advice will really help readers who might be scrambling a bit.