DF missed two years worth of IRA RMDs

[Sojourner]

I recently found out that my elderly DF (who has dementia) did not withdraw his RMDs in 2021 or 2022, due to confusion about the changing requirements due to COVID, etc. He has been on Aricept since early 2021, and I have been doing his tax returns since then, as well. I didn't catch the "missed RMD" issue last year at tax filing time—nor did the H&R Block software I used to prepare his return—so I was surprised to find out via his domestic partner that DF's bank had sent him a letter to notify him about the issue.

I am unsure what to do about this, so I thought I would ask this knowledgeable group.

1) Was there indeed an RMD requirement for calendar years 2021 and 2022 for regular, non-inherited IRAs for people 72 and older? I know it was waived for 2020, but from what I've read it seems that that was a one-year, one-time exception.
2) What should I do at this point to rectify the problem? I have read that there is a form/letter I should fill out and submit to the IRS on DF's behalf explaining the situation, and that doing so frequently results in any penalties being waived. But should I go ahead and take care of the RMDs for the two missed years right away? Or send in the form/letter first and wait for a response?
3) My DF's domestic partner thinks I should go into the local bank branch and speak to the most senior, IRA-knowledgeable person I can find about this... but I'm hesitant. I don't have much confidence in local bank employees' familiarity with the latest IRS rules and regulations these days. What would you do?

Thanks in advance for any and all feedback and suggestions.

 

[aja8888]

2020 pull was waived, 2021 and 2022 required. Maybe call the IRS to inquire what the process is for asking forgiveness?

 

[Sunset]

Did he take any money out of his IRA in 2021 and 2022 ?
Hopefully so, so that some could be considered partial RMD (might reduce the problem).

Is he well past 72 as in 75 or higher age ? (just looking for age reason to be late).

Finally does he have a 401K , as I thought the admin of those was responsible for doling out RMD , as they are treated separately from IRAs.

 

[RunningBum]

I have read that there is a form/letter I should fill out and submit to the IRS on DF's behalf explaining the situation, and that doing so frequently results in any penalties being waived. But should I go ahead and take care of the RMDs for the two missed years right away?

That's what I would do. It seems reasonable to explain his dementia and ask them to waive the penalty, but I can't see them waiving the RMD completely.

Going to the bank to do this makes sense, to make sure the withdrawals are credited as 2021 and 2022 RMDs.

 

[MarieIG]

I would get a CPA who deals with the IRS on a regular basis - along with a letter from DF's doctor about the longstanding AZ diagnosis (documenting good cause for failure to take withdrawals/ made payments).

I suspect that the withdrawals should be made and taxes paid ASAP, so that an argument could be made that payment was made as soon as POA discovered that this had not been done.

I would check with an expert in this regard however.

Who has the POA?

 

[MichaelB]

If the RMDs were missed I would take them immediately, file form 5329 asking for the penalty to be waived, explain the health situation and confirm what actions you / he may have taken to ensure it will not repeat. Then send a copy with a letter to his congressional rep asking for their assistance. If the penalty would severely impact his financial well-being I would point that out.

I did this when DM missed a withdrawal and the penalty was first assessed, and the IRS did waive it after her Senator’s office got involved.

 

[jebmke]

2020 pull was waived, 2021 and 2022 required. Maybe call the IRS to inquire what the process is for asking forgiveness?

Form 5329. I've done it a couple of times for taxpayers, including myself. They have always waived the penalty.

Sort explanation of reason why it was missed and that it will be caught up and process in place to avoid future misses. IRS normally waives the penalty. The missing RMDs need to be taken as soon as practical.

 

[RE2Boys]

this link may be of help in remedying the situation as to procedures.

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/http://www.bairdfinancialadvisor.com/thedavisschafflergroup/mediahandler/media/238751/Missed_RMD.pdf

 

[misanman]

Might have to take care with the calculation of the second year RMD, since the year end balance for 2021 would be inflated by the amount of the 2021 RMD that wasn't withdrawn.

 

[Sojourner]

Thanks to all for your helpful replies. I will go to the local bank branch ASAP and withdraw the two years of missed RMDs, and I will file Form 5329 with a detailed explanation of DF's medical condition. Will also include a letter from DF's doctor certifying his dementia diagnosis and treatments.

 

[MarieIG]

Thanks to all for your helpful replies. I will go to the local bank branch ASAP and withdraw the two years of missed RMDs, and I will file Form 5329 with a detailed explanation of DF's medical condition. Will also include a letter from DF's doctor certifying his dementia diagnosis and treatments.

If ever there was good cause/ a reasonable excuse . . .

 

[Sojourner]

Might have to take care with the calculation of the second year RMD, since the year end balance for 2021 would be inflated by the amount of the 2021 RMD that wasn't withdrawn.

Yes, I was thinking the same thing. I'll make a note to carefully go over this with the bank's IRA advisor/manager.

 

[38Chevy454]

Might have to take care with the calculation of the second year RMD, since the year end balance for 2021 would be inflated by the amount of the 2021 RMD that wasn't withdrawn.

Might even be good idea to take a little extra beyond the bare minimum. Just to ensure any differences due to method of calculation you used vs what the IRS or the IRA broker used. *Should* be the same, but a little extra is probably safe way to show you are trying to be fully compliant. I agree that filling out the form asking to waive the penalty, with supporting documentation of the withdrawals now, your POA authority, and the doctor's note verifying the mental deficiency. Seems as valid of a reason as ever; and you being proactive and showing the withdrawals as being completed prior to the submission shows your intent to get back in good standing.

 

[SecondCor521]

We trained on this issue in AARP Tax Aide this year.

The proper procedure is to take both RMDs as soon as possible. The RMDs should be based on the actual year ending balances (so 12/31/2020 for 2021, and 12/31/2021 for 2022) and the appropriate divisor from the tables.

Note that the tables were updated recently, so you should make sure to get a copy of a 2021 version of IRS Pub 590-B to get the divisor for 2021, and a copy of the 2022 version of IRS Pub 590-B to get the divisor for 2022. You can get prior year forms at https://www.irs.gov/forms-pubs/prior-year.

You should be sure to use the age he was on his birthday in 2021 for the 2021 RMD, and the age he was on his birthday in 2022 for the 2022 RMD.

You should not try to make any sort of adjustment for the alternative universe situation where his 2021 RMD, had it been taken on time, would have resulted in a lower balance at the end of 2022. While true in principal, as far as I know there is no legal permission to make any adjustment. The good news is that those larger RMDs will result in a smaller 2024 RMD, so it will even out over time. And of course you don't have to spend the RMDs, you just have to take the distributions.

Although you could take a total for both years as one transaction, I would probably make two separate distributions. That way, when you provide your explanation, you can provide a copy of the single transaction for each year and the IRS can treat and check each year individually.

After you make the corrective distributions, you'll need to amend his 2021 and 2022 tax returns and file a Form 5329 for each year, filling out Part IX. You'll put what he should have taken on line 52, what he actually took on line 53, then on line 54, next to the line description you'll put "RC=$X" where $X is the difference of what he should have taken but did not. Then put a $0 on line 54 and on 55. Attach a statement of explanation with the information about dementia and that they were missed but corrective distributions have been made to Form 5329 and the 1040-X. You'll also have to give a reason for the amendment on the 1040-X itself - this can be a short and simple explanation: "TP missed RMD distribution in 202x. Filing amended return to provide 5329 and request waiver for reasonable cause."

Mail the amended returns with the Form 5329s and two copies of your explanatory statement and the proof of that year's corrective distribution in two separate envelopes - one for 2021 and one for 2022. Do not mail them together. Mail them to the proper address for amended returns - it may be different from your normal IRS processing center. See the IRS instructions for Form 1040-X for the applicable years.

The IRS will receive and review the documentation. If they disagree and think the penalty should be assessed, they will contact you by mail. However, generally speaking, the IRS has been very accommodative in waiving the penalty in situations like this, and your case is clearly very compelling.

I wouldn't bother with the people at the bank. All they are probably aware of is that he is subject to RMDs. Beyond that, they're probably not well versed in how to address the problem.

Since you're not changing anything on the underlying tax returns, I doubt your state tax commission needs to receive a copy of the federal amended returns. But check on that.

Your local AARP Foundation Tax Aide tax preparers should be able to answer questions about this topic. It is in scope for us. But I'd try to ask a site coordinator or an experienced volunteer, as it's an uncommon topic.

You can also read for yourself the instructions for Form 5329 at https://www.irs.gov/pub/irs-pdf/i5329.pdf. The relevant part starts on page 9, "Waiver of tax for reasonable cause."

Don't forget to take his RMD for 2023. The 2021 and 2022 corrective distributions won't count towards this year's RMD.

You might check with his custodian to see if they have an automatic RMD service. Vanguard has one, I assume most of the major custodians also have one. Getting it on autopilot means one less thing to manage.

Oh, and the 2021 and 2022 corrective distributions and his regular 2023 RMD will all be added together on his 1099-R and may cause him to be in a much higher tax bracket in 2023. Perhaps do his tax strategizing and tax planning with that in mind.

If his increased income in 2023 as a result of this situation results in an increase in his Medicare premiums in 2025, you might try appealing that increase.

(The above all assumes that it's his IRA and that he was subject to RMDs for those two years, both of which sound like they are the case.)

 

[Sojourner]

We trained on this issue in AARP Tax Aide this year.

The proper procedure is to take both RMDs as soon as possible. [...]

(The above all assumes that it's his IRA and that he was subject to RMDs for those two years, both of which sound like they are the case.)

Thank you so much for this detailed, step-by-step guide! Incredibly helpful.

 

[Texas Proud]

If the RMDs were missed I would take them immediately, file form 5329 asking for the penalty to be waived, explain the health situation and confirm what actions you / he may have taken to ensure it will not repeat. Then send a copy with a letter to his congressional rep asking for their assistance. If the penalty would severely impact his financial well-being I would point that out.

I did this when DM missed a withdrawal and the penalty was first assessed, and the IRS did waive it after her Senator’s office got involved.

+1 My sister did not take an RMD from my deceased mom when required even though I sent many letters to everybody reminding them they had to...


She withdrew it the next year and put it on her taxes and filled out the form... so far nothing from the IRS...