Question: I didn't take my RMD for 2017. There was a mixup between myself and my broker. After reading an article I proceeded to take my 2017 RMD on March 21, 2018. My accountant is not sure if I can do that without paying the penalty.

Answer: Dennis LaVoy, a certified financial planner and founder of Telos Financial, offered this response:

Let's start off by understanding the rule. If you have a qualified account, the year you turn age 70½, and every year after, you have to take a distribution from those (or one of those) accounts based on the total balance of all qualified accounts at the end of the prior year. Qualified accounts include traditional IRA, traditional 401(k), 403(b), 401(a), PSP, and RSP, to name a few.

(Note: RMD requirements changed under the new SECURE Act retirement legislation. Read more about that here.)

For this response, let's assume your birthday is Nov. 25, 1946. Your 70th birthday was Nov. 25, 2016 and you turned 70½ May 25, 2017. That means you were required to take your first required minimum distribution in 2017. Each year, this is calculated based on life expectancy tables provided by the IRS, the year you turn 70½, that number is 27.4 so you would add up all of these accounts and divide by 27.4 to get the amount you need to take in that year.

As you get older, your life expectancy goes down, so the amount of the distribution continues to increase each year by approximately one half of one percent. The amount will also fluctuate with the account value, so it's important to pay attention to the calculation and appropriate life expectancy tables each year when you calculate.

The first year, you have until the tax filing deadline to take this distribution. Every year after that, you have to take it during the calendar year. So, if your accounts on Dec. 31, 2016 totaled $1,000,000 you would have to withdraw at least $36,496.35 gross from one of your qualified accounts by April 15, 2018. It's still a 2017 distribution, but the first year the rule is more flexible. Remember, you have to take this in the year it's for; a withdrawal in December 2016 could not be counted for 2017.

The IRS really wants you to withdraw this money so they get the taxes on the distributions. So, they've made the penalty for not taking RMDs properly massive. It's 50% of the RMD missed, so if you didn't take it for the year in the example, the penalty would be over $18,000! It's absolutely staggering. The good news is the IRS is not a cold beast (at least in this case).

Further, if this is a traditional or Roth IRA you inherited, it gets more complicated. There are options for how to take the funds, but the major difference is you need to begin making withdrawals in the year after the year the deceased passed away or you'll have to withdraw all the funds within five years of their passing.

Let's get to the meat of your question. You really only have one viable option. You will be best served to file form 5329 and write a letter to the IRS explaining what happened, explain you took the distribution a little late, and beg for forgiveness. The letter isn't mandatory, but it's the best way to help explain this was a one-time error due to unusual circumstances, you've taken action to acknowledge the mistake, and have set the process in place to make sure it won't happen again.

Let's further assume this was a one-time miss (let's say you're 77 and you've taken it properly every year, but just a little late in your 76th year, not that you missed it for the previous 5 years and just took your first).

Your best bet is to do what's right, own up to the mistake, make your best plea for mercy, and hope they let you off easy. I think there's a high likelihood they will waive the penalty since you owned up to it.

Question: I didn't take my RMD for 2017. There was a mixup between myself and my broker. After reading an article I proceeded to take my 2017 RMD on March 21, 2018. My accountant is not sure if I can do that without paying the penalty.

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