I forgot to take my RMD — now what?

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Dear Dan,

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The 401(k) plan with my current employer allows me to forgo RMDs (I turned 72 last year) and I don’t have any RMDs on my Roth IRA, so I think I’ve done the same about my other accounts. Didn’t think I now realize that I should have taken an RMD from my old employer’s 401(k) and I didn’t touch that account. how bad is it and what do i do about it,

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james

Dear James,

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James, despite a legislative cut being passed in the last week of 2022, the penalty for missing a required minimum distribution (RMD) is still one of the harshest in the tax code – 25% of the shortfall if the error is not corrected fast enough. . Since you didn’t take anything, if your RMD on that account was $20,000, the reduction would also be $20,000, making the penalty $5,000.

However, it may not be as painful as it sounds.

Because you turned 72 last year, your 2022 RMD is your first RMD. Technically, you can defer your first RMD until April 1 of the following year, 2023. Therefore, you still have time. Recent legislation raised the RMD age to 73 but you were already over RMD age and the law does not give you the exemption for 2022.

If you were writing to me after this April 1 deadline or were over age and therefore missed more than a year’s RMD, you can try to beg for forgiveness. Here’s what you need to do to make up for missed RMDs from the old 401(k). RMD rules can be confusing. Fortunately, the IRS is actually pretty understanding about missed RMDs. I do not know whether this will be the case now that the fine has been reduced. The IRS may lower their tolerance for the shortfall. we will see.

The days of IRS amnesty for RMD mistakes may soon be over

The process involves taking the RMD and filling up a form. Firstly, the taxpayer should take up the missed RMD as soon as possible. When more than one year is involved, computing the RMD amounts is not straightforward because the RMD is based on the year-end balance and since the RMDs were not taken, they are higher than the year-end balance because they would be otherwise as the RMD was not withdrawn. , Fortunately, there is a process in the IRS regulations to accommodate for this. You can use year-end balances if you want, but if you just use year-end balances without adjustments, you’ll take out more than you need.

Should I be buying more I-Bonds? What should I do when my I-Bond matures? Answers to your questions about Series I bonds.

Many tax practitioners recommend taking each RMD as a separate transaction with no tax withholding. Doing it this way means you’ll receive a check for the full amount of each RMD, not a check for the total amount withheld. This makes tracking and documentation easy. The check must be deposited into a taxable account and not an IRA, Roth or retirement account.

The taxable income from these RMDs is reported on the return for the tax year in which they were distributed, not the year(s) during which the RMD was to be taken. There is no need to amend earlier returns. This extra income may require you to adjust current year’s withholding or make estimated tax payments.

You will then file a Form 5329 for the distribution each year and attach both an explanation of why the RMD was missed and a copy of the check for that year’s RMD.

In the past you would not have paid the penalty and expected not to hear from the IRS. Given recent legislation, I suspect more people will be hearing from the IRS to recover fines. I recommend getting a licensed tax preparer to help you with this and file Form 5329.

Some things for you to consider, James. If you plan to work for a while, consider rolling over your old 401(k) into your current employer’s plan. This will not get you out of your missed RMD problem from the old plan, but having those assets in the current plan will block RMDs for future years. As long as you continue working for your current employer, you will be eligible for more than 5 Will not own % of the company, and your current plan allows you to forgo RMDs while working.

When you leave your current employer, you will have an RMD from your current employer’s plan for the year in which you separate from employment there. That RMD can be taken in the year you leave or by the end of April 1 of the year.

If you have any questions for Dan, please email him With “Marketwatch Q&A” on the subject line.

Dan Moisand is one Financial planner at Moisand Fitzgerald Tamayo Serving customers nationwide from offices in Orlando, Melbourne and Tampa Florida. His comments are for informational purposes only and are not a substitute for personal advice. Consult your advisor about what is best for you. Some reader questions are edited to aid in the presentation of the subject matter.

Credit: www.marketwatch.com /

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