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A recent call with a financial advisor in Ohio is representative of a common question on missed RMDs.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“A client failed to take a required minimum distribution (RMD) by the deadline. What are the implications and appropriate next steps?”
Clients who miss an RMD have an “excess accumulation,” and are subject to an IRS excise tax under IRC §4974 of 25% of the shortfall, which may be reduced to 10% if corrected promptly (i.e., generally, within two years after the RMD was due). Penalty relief may be available. For qualified plans [e.g., 401(k)], missed RMDs may also create a plan qualification failure under IRC §401(a)(9), requiring correction.
Timing for Reduced 10% Penalty:
RMD missed for 2025
Correction window ends December 31, 2027
RMDs generally begin after an individual attains age 73, although some plan participants (but not IRA owners) may delay taking their first RMDs until after retirement if the plan allows (i.e., those who continue to work past 73 and own 5% or less of the business sponsoring the plan). Absent an exception, the first RMD is due April 1 following the year an individual turns 73. The second and subsequent RMDs are due by December 31 annually.
The IRS has prescribed how to correct missed RMDs. Your client should:
Immediately correct the shortfall. Ensure the client withdraws the missed RMD promptly.
Coordinate the filing of Form 5329 and correction steps with their tax professionals. Engage a CPA or tax advisor to ensure proper filing and documentation.
Assess eligibility for penalty relief. The IRS may waive or reduce the penalty if your client can show that any shortfall in the RMD was due to a reasonable cause and they are taking steps to remedy the shortfall. If your client believes they qualify for this relief, they should file Form 5329 with a statement of explanation according to the form’s instructions. They must pay any tax due that is reported on Form 5329. The IRS will review the information they provide and decide whether to grant a waiver of the penalty. If the request is not granted, the IRS will notify your client regarding any additional tax they may owe on the shortfall.
If the missed RMD is due to a plan error, the sponsor should utilize the IRS’s Employee Plan Compliance Resolution system (EPCRS) to correct missed RMDs and preserve the plan’s tax-qualified status.
Missing an RMD can result in penalties for the recipient and, for employer plans, potential qualification issues. Fortunately, relief may be available if errors are corrected promptly and properly documented. Given the complexity and potential consequences, individuals should work closely with tax advisors to ensure compliance.