Avoiding the Missed RMD Penalty Post-SECURE Acts

401(k) RMDs are calculated separately, based on the specific account value. When calculating RMDs for IRAs, all of the owner’s traditional, SIMPLE and SEP IRAs are grouped together in arriving at the final RMD amount. The owner can then take the RMD from any IRA of their choosing.

The original SECURE Act increased the required beginning date (RBD), or the age at which taxpayers must begin taking distributions from traditional retirement accounts, from age 70.5 to age 72. Under post-SECURE Act 2.0 law, taxpayers have until April 1 of the year following the year they reach age 73 to take their first RMD. After that, RMDs are due by December 31. Taxpayers who were already subject to the RMD rules prior to the SECURE Acts were required to keep taking those RMDs.

SECURE Act 2.0 Missed RMD Penalty Changes

Prior to the SECURE Act 2.0, the penalty for a missed RMD was 50% of the amount that should have been taken for the year, but was not.

The SECURE Act 2.0 reduced that penalty amount to 25% of the missed RMD effective with the 2023 tax year. The penalty amount is further reduced to 10% of the missed RMD if the taxpayer takes all missed RMDs and files a tax return paying the required tax and penalty amount before the earlier of (1) receiving a notice of assessment of the RMD penalty tax or (2) two years from the year of the missed RMD.

Prior to the SECURE Act 2.0 changes, the IRS had authority to waive the 50% penalty if the taxpayer filed a Form 5329 and took all missed distributions. The IRS has indicated that it will still adhere to this system despite the fact that the penalties have been reduced (possibly because the penalties remain

significant even with the changes). Clients should understand that it may still be possible to pay no penalties at all even with the reduced 25% (or 10%) penalty structure.

Taxpayers with missed RMDs can attach the Form 5329 to their tax return or file it separately, providing an explanation of why they failed to take their RMDs.

The SECURE Act 2.0 also created a new statute of limitations with respect to penalties for missed RMDs. Prior to the new law, if a taxpayer did not file the Form 5329, the IRS had an unlimited amount of time to go back and assess penalties. Because many taxpayers did not know they had missed RMDs in the first place, they would never file the Form 5329, creating the possibility that the 50% penalty could be assessed for years’ worth of missed RMDs.

Under the new law, if the taxpayer files their income tax return with an explanation of how they calculated their RMDs for the year, the IRS has three years from the date of filing to assess penalties. If they fail to attach the explanation of how their RMDs were calculated, a six-year statute of limitations applies. These new limitations periods apply for the 2022 tax year and later.

Tips for Avoiding Missed RMDs

The RMD rules can be confusing—especially when the post-SECURE Act changes are considered. Many taxpayers don’t even know that these obligations exist.

Staying organized can be key to avoiding penalties. Over the years, clients may have opened multiple IRAs with different financial institutions. While the financial institution calculates the client’s RMD obligation, they may not be aware of IRAs that are maintained with other financial institutions. It’s ultimately up to the client to make sure their RMDs are accurately calculated.

Clients should be advised to make a list of all existing IRAs—and to consolidate whenever possible. Missed RMDs are much more likely to occur when a client has multiple IRAs and must calculate their RMDs based on the total value of those accounts.

Conclusion

Despite the SECURE Act changes, penalties for missed RMDs remain steep. Correctly calculating RMDs the first time can help clients avoid headaches with the IRS down the road. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.