November 12, 2019
Taxes, retirement and end of year preparations
Certain retirement savings plans allow for a tax deferment. The Internal Revenue Service (IRS) will eventually expect taxpayers to pay taxes on those savings. In most cases, the agency requires the taxpayer to start taking required minimum distributions (RMDs) and making payments when they reach the age of 70 and ½.
Examples of applicable accounts include 401(k)s and work savings accounts.
What happens if a taxpayer fails to take out RMDs?
Figuring out the best time to take payments and the exact amount of RMDs that are required is not an easy task. As a result, taxpayers may find themselves failing to take out the RMDs before the expected deadline. If this happens, the IRS can bill the taxpayer with steep tax penalties.
In some cases, this can be as much as 50% of the RMDs.
Taxpayers who fail to take their RMDs are still generally encouraged to file a Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Part IX of this form, Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs), provides taxpayers an opportunity to report a failure to take their RMDs. Some retirement savings experts have reported success in avoiding the penalty by filing out this form and providing an explanation for the failure to take out the RMDs. If the IRS deems the explanation sufficient, these experts state the agency has, in some instances, forgiven the penalty.
It is not uncommon for a misstep in retirement planning to trigger a federal tax audit. Those who find themselves the subject of an audit are wise to act to protect their interests. An attorney experienced in federal tax matters can review the correspondence from the IRS and discuss your options.