How the Penalty Works
The penalty for failing to take your full RMD by December 31st is severe—25% of the amount you were supposed to withdraw. For example, if you were required to take $10,000 RMD but only withdrew $6,000, the penalty would be $1,000 (25% of the $4,000 you failed to withdraw).
However, the good news is that if you realize the mistake and correct it promptly, the penalty can be reduced. If you correct the mistake within a reasonable timeframe (typically by filing an amended return), the penalty is reduced to 10%. While this is still a penalty, it’s far more manageable than the original 25%.
How to Avoid Missing Your RMD
To avoid this costly mistake, it’s crucial to stay on top of your RMD requirements. Here are a few steps you can take to ensure you don’t miss the deadline:
- Track Your RMD Deadline: Make sure you know the deadline for each year. The IRS requires that you take your RMD by December 31st to avoid penalties.
- Automate Your Distributions: Consider setting up automatic withdrawals for your RMDs. This ensures that the full amount is taken each year, reducing the risk of forgetting or making a mistake.
- Consult a Financial Advisor: A financial advisor can help you navigate the complexities of RMDs and ensure that you take the correct amount each year.
- Monitor Your Account Balances: Keep track of your retirement account balances and calculate your RMD in advance. This will help you avoid underestimating or overestimating your required withdrawal.
Correcting RMD Mistakes
If you realize you’ve missed your RMD or withdrawn less than the required amount, it’s important to take corrective action immediately. Contact your plan administrator to make the necessary withdrawal and file an amended tax return if needed. By doing so quickly, you may be able to reduce the penalty from 25% to 10%.
