I forgot to take my RMD — now what?

Dear Dan,

The 401(k) plan with my current employer allows me (I turned 72 last year) to skip the RMD and there is no RMD on my Roth IRA so I guess I didn’t think about my other accounts. I realize now that I should have taken an RMD from my old employer’s 401(k) and I didn’t touch that account. How bad is that and what do I do about it?


Dear James,

James, despite a legislative reduction passed the last week of 2022, the penalty for missing a required minimum distribution (RMD) is still one of the stiffest in the tax code — 25% of the shortfall if the error is not fixed fast enough. Since you took nothing, if your RMD on that account was $20,000, the shortfall would also be $20,000 making the penalty $5,000.

However, it might not be as painful as it appears.

Because you turned 72 last year, your 2022 RMD is your first RMD. Technically, you may delay your first RMD until April 1 of the following year, 2023. So, you still have time. The recent legislation raised the RMD age to 73 but you were already RMD age and the law doesn’t exempt you for 2022.

If you were writing me after this April 1 deadline or were older and had therefore missed more than one year’s RMD, you can try begging for forgiveness. This is what you will need to do to address the RMD you missed from the old 401(k). RMD rules can get confusing. Fortunately, the IRS has actually been quite understanding about missed RMDs. I don’t know if that will still be the case now that the penalty has been reduced. The IRS may reduce their tolerance for shortfalls. We’ll see.

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Read: The days of IRS forgiveness for RMD mistakes may soon be over

The process involves taking the RMD and filing a form. First, the taxpayer should take missed RMDs as soon as possible. When more than one year is involved, calculating the RMD amounts is not straightforward because the RMD is based on year-end balances and since RMDs were not taken, those year-end balances are higher than they would be otherwise because the RMDs were not withdrawn. Fortunately, IRS regulations have a process to adjust for this. You can use the year-end balances if you want to but if you just use the year-end balances without adjustments, you will withdraw more than necessary.

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Many tax practitioners recommend taking each RMD in separate transactions with no tax withholding. Doing it this way means you will receive a check for the full amount of each RMD, not checks for an amount net of withholding. This makes tracking and documenting easier. The checks must be deposited into a taxable account 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 supposed to be taken. There is no need to amend prior returns. You may need to adjust the current year’s withholding or make estimated tax payments due to this extra income.

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

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In the past you would not pay the penalty and hope not to hear from the IRS. Given the recent legislation, I suspect more people will be hearing from the IRS to collect the penalty. I recommend you get a licensed tax preparer to help you with this and file Form 5329.

A couple of things for you to consider, James. If you plan on working a while, consider rolling your old 401(k) into your current employer’s plan. It won’t get you out of your missed RMD problem from the old plan, but having those assets in the current plan will stop the RMD for future years as long as you keep working for your current employer, you do not own more than 5% of the company, and your current plan allows you to skip 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 as late as April 1 of the year after. 

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line. 

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

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