Rules for RMDs and Penalty for a Missed RMD

You’d think that you’d remember to take your required minimum distribution (RMD) every year from your retirement plan. But it’s a common mistake, especially if you’re working past retirement age and don’t need those funds to live on. Add the fact that recent laws passed changing RMD ages, and perhaps you were confused about when to take yours. Regardless, there is a penalty for a missed RMD, plus a lot of stress trying to fix the mistake.

Tax time is usually when people discover a missed RMD—and your first impulseBlocks spelling out the word RMD on a desk with cash and calculator in background may be to panic. However, if you forgot to take an RMD, there are steps you can take to correct your oversight and possibly avoid penalties from the IRS. This article covers the RMD age when you must start and explains what to do if you forgot to take yours on time.

Please note that these rules apply to typical retirement plans as well as self-directed retirement plans.

RMD Age Rules

The age that you must begin taking RMDs depends on recent rulings and when you were born.

Prior to 2019, the RMD age was 70 ½. But the SECURE Act of 2019 moved that age to 72. And Section 107 of the SECURE Act 2.0 that passed in late 2022 moves RMD ages even farther out over the next 10 years.

Here’s what you need to know now that the latest SECURE Act 2.0 law passed:

    • Those who began taking RMDs at age 70 ½ or 72 must continue to do so
    • On January 1, 2023, and beyond RMDs start when you turn 73
    • The age moves up to 75 beginning January 1, 2033, and later

For 2023 RMDs, the deadline to submit your complete and accurate distribution documents to us is 12/15/2023, so we can process them this year.

RMD Rules for Inherited IRAs

RMD rules for inherited IRAs are different than the rules are for your own retirement account. Rules also differ depending on who you inherit the account from.

If you inherited the IRA prior to January 1, 2020, you enjoy the benefit of having no deadline to deplete the account balance. Spouses can choose to roll inherited funds over into their own retirement plan and treat the funds as their own. Non-spousal beneficiaries must take annual distributions from the account. Your RMD amount is based on your own life span.

For those who inherit after January 1, 2020, the initial SECURE Act that passed in 2019 changed the rules for non-spousal IRA beneficiaries. Non-spousal beneficiaries who inherit in 2020 and after have 10 years to withdraw all funds from inherited IRAs—the lifetime stretch benefit is no longer an option.

The caveat is you are not required to take distributions every year. You can take a lump-sum distribution of all funds in the account or withdraw funds slowly whenever you wish. But the balance must be completely zeroed out within 10 years of your inheriting it. Spouses who inherit IRAs still enjoy the lifetime stretch benefit and the ability to roll the funds into their own retirement plan.

Penalty for a Missed RMD

The IRS imposes an excise tax on the RMD amount you failed to withdraw. Prior to 2023, that excise tax was 50 percent. But Section 302 of the SECURE Act 2.0 knocked that tax down to 25 percent. Plus, if you take corrective measures to withdraw that forgotten RMD within a timely manner, the tax is reduced to 10 percent. For those wondering what “timely manner” means, an article published by Forbes says the law states you must withdraw your full RMD by the second year after you missed your RMD or before the IRS assesses your penalty. If the IRS assesses your penalty before the second year, you must pay it

What to Do if You Missed an RMD

If you forgot to take an RMD there is something you can do to increase your chances of avoiding any penalty—you can request a waiver of that penalty from the IRS.

How to request a waiver of penalty:

    • The minute you realize you forgot to take an RMD, withdraw the distribution!
    • Prepare Form 5329, which details the missed distribution penalty.
    • Write a letter to the IRS to tell them why you missed this withdrawal.
    • Submit the form and letter with your tax return if you haven’t filed yet.
    • Submit the form and letter separately if you already filed your tax return.

You must have a reasonable cause to have missed taking your RMD, which you’ll detail in your letter—and hopefully the IRS approves your waiver. We highly recommend you consult appropriate counsel to help you with the letter and the form, but the instructions to Form 5329 can help you better understand the implications and the waiver.

If you have any questions about this article or want to learn about self-directed IRAs and alternative investments, please contact Advanta IRA.

Additional resources:

10 FAQs about a Self-Directed IRA (SDIRA) + Alternative Investments

Self-Directed IRAs vs. Traditional IRAs: Which Plan Is Best for You?

Advanta IRA’s Alternative Investing Advantage Podcast

This article was initially published on March 26, 2019, and has been updated with the most current information regarding RMD age and a missed RMD.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.