Required Minimum Distributions (RMDs) are the annual minimum that retirement account holders must withdraw once they reach the age of 70.5 (although there are some exceptions and slightly different rules for different types of accounts). All employer-sponsored plans are subject to RMD rules.
One of the more common problems I deal with as a financial professional is helping my clients deal with situations where they have forgotten to withdraw their RMD and are subsequently faced with a punitive 50% penalty for that oversight. The 50% penalty is applied to the amount that should have been withdrawn from the account. If you discover that you have missed a required minimum distribution, however, all is not lost. Yes, you are still subject to the 50% penalty, but there are circumstances where it can be waived. The penalty can be waived if the failure to withdraw the funds was due to “reasonable error” and you can demonstrate that steps are being taken to rectify the situation.
The first thing anyone in this situation should do is to get current: as soon as you realize you have missed an RMD, take it out right away. If you have missed more than a year, take out multiple withdrawals corresponding to the amounts that should have been withdrawn each year.
What you want to do is demonstrate that you realize your mistake and are actively working to correct the issue. In the process, you are creating a paper trail for the IRS that will hopefully help your case when you appeal. In order to qualify for an exemption, you must file an IRS form (form 5329) and attach a letter of explanation. Do not file an amended return. If your RMD oversight extends over multiple years, file separate 5329 forms for each year missed, attaching copies of the check to prove that the funds have been taken out. In your letter of explanation, be sure to mention if there are any extenuating circumstances, such as an illness, IRA custodian issues, or problems with your tax preparer.
If you have any questions, be sure to consult a financial advisor. It is well worth the modest amount of effort it takes to avoid being hit with a costly 50% penalty from what amounts to a simple oversight.