07 Jan It’s costly to forget your RMD
Q. I never took my Required Minimum Distribution (RMD) last year. I know there’s a penalty. How bad, and is there anything I can do about it?
A. Oh, boy. That’s one financial error that can be really costly. The penalties for not taking the correct RMD are significant.
If an individual fails to withdrawal all or part of their required RMD there is a 50 percent penalty on the shortfall, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.
She offered this example: If your RMD was $10,000, and you only withdrew $2,000, you’re short $8,000 and will incur a $4,000 penalty. If you did not make any withdrawals, you would incur a $5,000 penalty.
If you turned 70½ last year, you have until April 1 to make the appropriate withdrawal, Williams said.
Given your particular situation, Williams said, this is a huge positive. But, this is not usually a recommended strategy because you’d be taking two RMDs in one year.
“This can impact your taxes and may cause a ripple effect for any benefits you receive contingent on income,” Williams said.
If you have in fact forgotten to take your RMD, make the withdrawal immediately, file a Form 5329 and include a waiver request letter with your tax return.
“The waiver request should explain what happened, reveal that the missed RMD has been taken and ask that the 50 percent penalty be waived,” Williams said. “It should be noted that the withdrawal will be recognized as ordinary income in the year it’s taken, not the year it should have been – even if the penalty waiver is granted.”
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This story was first posted in January 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.