IRS Imposes 50% Penalty on Retirees Who Fail to Withdraw Timely Required Minimum Distributions
By Hersh Stern - November 8, 2013
The IRS requires you to begin withdrawing around 4% percent from your IRAs upon reaching the age of 70-½. Failure to do so can result in steep penalties, as high as 50%. The Treasury Inspector General recently reported that as many as 250,000 tax payers failed to withdraw the required amount from their IRAs. Why are so many retirees failing to meet the IRS’s required minimum distribution (RMD) withdrawals?
In most cases, retirees fail to withdraw the required funds from their IRA’s annually by accident. In some cases, multiple accounts spread across multiple financial institutions could play a part in this growing trend. Or, these tax payers may have simply incorrectly calculated the amount to withdraw for the given year. In any event, it's important you don't forget to withdraw the correct amount. This FAQ reviews some of the important aspects of RMDs you may not have heard about.
How To Calculate Your Required Minimum Distribution
Find your IRA balance from December 31st of the previous year. Divide this amount by the distribution period found on the chart below using the age you will turn on your birthday this year. This is your RMD amount for this year.
Example: If your IRA balance was $100,000 and your age is or will be 75 this year, you would divide the balance by 22.9. Your RMD for this year would be $4,366.82. You can find the IRS worksheet here.
What is the current penalty for failing to meet IRA RMDs?
Currently, the IRS can assess a penalty as high as 50% of the amount that should have been taken out. For example, if you were required to withdrawal $10,000 from your IRAs and you failed to do so, your IRS penalty could be as high as $5,000! In addition, you will be responsible for federal income taxes on the $10,000 amount once you do take the RMD.
I failed to take out RMDs in prior tax years. Is there a penalty?
Yes. There is no statute of limitations on how far back the IRS can look for RMD mistakes. If you have discovered mistakes in prior year’s withdrawal amounts, correct those figures immediately. If you can provide evidence that you made a reasonable mistake when calculating distributions for prior years, the IRS does have the ability to waive penalty fees. The most common reasons considered for waiving fees include serious illness or dementia.
How can I avoid IRS penalties in the future?
The most important thing to do is accurately track all of your IRA accounts at various firms. Your total annual distributions from these IRA accounts must be coordinated.
To simplify this process, consider consolidating some of your IRA assets into a single premium immediate annuity. Monthly income payments from an immediate annuity are considered by the IRS to be sufficient for satisfying RMD requirements for the IRA amount initially deposited into that annuity. In simplest terms, once you pay the premium for an immediate annuity, you won’t have to concern yourself with calculating or meeting RMDs for that money in future tax years. And, you won’t have to worry about the looming 50% penalty if you were to miss or miscalculate a RMD for the amount you paid into the immediate annuity.
Immediate Annuity Calculator
Here is an immediate annuity calculator. It calculates the amount of monthly income you will receive in return for a specific "Investment". Investment (aka Premium) is the purchase amount you pay to the insurance company. With this calculator you can also find what Investment would be necessary in order to receive a specific monthly income amount. To use the annuity calculator, simply highlight your age, state, and gender. Then enter a dollar amount in only one of the two boxes labeled "Investment" or "Monthly Income." Click "Calculate" and you will see a table with annuity quotes. Feel free to call 800-872-6684 if you have any questions about annuities or the quotes.
If an immediate annuity is not suitable for your financial situation, consider deposit some of your IRA funds into a fixed index or multiyear deferred annuity. Most insurance companies will automatically send you your annual RMD from your deferred annuity accounts if you ask them to. This way there will be little chance that you'll miss a required withdrawal on your own.
You can read more about RMDs and annuities here.
Do you need help with annuities? Call our annuity experts toll-free at 800-872-6684 (Monday-Friday, 9AM-5PM EST). Or, send your questions and comments by email here. We'll get back to you within 24 hours with an answer!
Important Notice: This information is not intended to be a recommendation to purchase an annuity. You should consult with a financial planner to determine if an annuity is a suitable product in your situation. Also, be advised that tax information published at this site is written to support the promotion of annuities. It is based on limited facts and should not be relied upon. You should consult with your own tax and legal advisors for an opinion about what could or should be done in your particular situation.