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The rules around required minimum distributions from retirement accounts are confusing, and it can be easy to slip up. Fortunately, if you do make a mistake, there are steps you can take to fix the error and possibly avoid a stiff penalty.
If you have a tax-deferred retirement plan such as a traditional IRA or 401(k), you are required to begin taking distributions once you reach a certain age, with the withdrawn money taxed at your then-current tax rate. If you were age 70 1/2 before the end of 2019, you had to begin taking required minimum distributions (RMDs) in April of the year after you turned 70. But if you were not not yet 70 1/2 by the end of 2019, you can wait to take RMDs until age 72. If you miss a withdrawal or take less than you were required, you must pay a 50 percent excise tax on the amount that should have been distributed but was not.
It can be easy to miss a distribution or withdraw the incorrect amount. If you make a mistake, the first step is to quickly address the mistake and take the correct distribution. If you missed more than one distribution – either from multiple years or because you withdrew from several different accounts in the same year – it is better to take each distribution separately and for exactly the amount of the deficit.
The next step is to file IRS form 5329. If you have more than one missed distribution, you can include them on one form as long as they all occurred in the same year. If you missed distributions in multiple years, you need to file a separate form for each year. Additionally, married couples who both missed a distribution need to each file their own forms. The form can be tricky, so follow the instructions closely to ensure you fill it out correctly.
In addition to completing form 5329, you should submit a letter that explains why you missed the distribution and informs the IRS that you have now made the correct distributions. There is no clear definition of what the IRS will consider a reasonable explanation for missing a distribution. If the IRS does not waive the penalty, it will send you a notice.