Additional Tax on Excess Accumulation in Qualified Retired Plans (Including IRAs)
Prior to 2023 the penalty for not taking an RMD was 50% of the amount that should have been distributed and wasn’t, but with a very liberal penalty waiver where the shortfall was due to reasonable cause and the taxpayer corrected the shortfall.
With passage of the SECURE 2.0 Act the 50% penalty has been reduced to 25% or 10% and the IRS has also retained the potential for a full penalty waiver for reasonable cause. Thus, barring any law change, for 2023 and future years there are 3 penalty options as explained below.
1) 25% Penalty - Is the default penalty if neither the 10% penalty or the penalty waiver applies.
2) 10% Penalty - For the 10% penalty rate to apply, a taxpayer who received a distribution that resulted in imposition of the excess accumulation penalty from the same plan to which the penalty relates during the correction window must submit a return during the correction window that reflects the tax.
The correction window means the period beginning on the date on which the penalty is imposed and ending on the earliest of:
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The date of mailing a notice of deficiency with respect to the penalty,
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The date on which the penalty tax is assessed, or
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The last day of the second taxable year that begins after the end of the taxable year in which the penalty tax is imposed.
The instructions for the Form 5329 now include a worksheet for figuring the 25% or 10% penalties. That worksheet should be included as part of all professional tax prep software.
3) Reasonable Cause Penalty Waiver - The IRS in the instructions for Form 5329 (2023), continues to provide a very liberal policy for waiving the penalty. Generally, it must be shown that the failure to take the required distribution was due to reasonable cause and that steps are being taken to remedy the shortfall. If it is believed the taxpayer qualifies for this relief, attach a statement of explanation and file Form 5329 as follows.
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Complete lines 52 and 53 as instructed.
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Enter “RC” and the amount of the shortfall to be waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall figured without regard to the waiver, and enter the result on line 54.
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Complete line 55 as instructed. The taxpayer must pay any tax due that is reported on line 55.
The IRS will review the information provided and decide whether to grant the request for a waiver. If the request is not granted, the IRS will notify the taxpayer regarding any additional tax owed on the shortfall.
Taxpayer Not Required to File a 1040 – If the taxpayer does not have an income tax return filing requirement but has a Form 5329 filing requirement, it must be completed and filed by itself with any required statements. The form includes a signature block like a 1040 signature block. If filing Form 5329 by itself, it can’t be filed electronically.