So you got your numbers mixed up, or your brokerage firm made a mistake. You didn’t take out enough when you did your annual Required Minimum Distribution from your IRA. What you do next is important.
Everyone makes mistakes, and that includes taking out the wrong amount for your annual RMD from your IRA. Sometimes brokerage houses make mistakes, or the account was divided into two accounts and you forgot. The important thing: don’t hope this will go away. It won’t.
If the mistake was caused by an oversight at the brokerage firm, can you avoid the 50% penalty, if they admit the error in a letter to the IRS?
Kiplinger’s recent article, “How to Correct a Mistake on Your RMDs from IRAs” advises that you don’t need to send the IRS a letter from the brokerage firm, but you do need to take some action immediately to ask the IRS if it will waive the penalty.
You need to first figure out the exact amount you should’ve withdrawn as your RMD and withdraw the money right away, if you haven’t already. You should then file a separate Form 5329 immediately for each year’s RMD you missed.
You should fill in lines 52 and 53 with the amount you should have withdrawn, then write “RC.” This means “reasonable cause.” Also write in the amount of the penalty you want waived in parentheses on the dotted line next to line 54. You should include a brief note that says the RMD was omitted by the brokerage company and was withdrawn immediately upon discovery. Keep it brief—don’t go into all the details.
You shouldn’t send any penalty money, unless the IRS denies your request for a penalty waiver.
Denials are pretty rare, especially for someone who withdrew the money as soon as she realized the mistake and filed Form 5329 proactively with reasonable cause.
Retain the letter or any communication in your files from the broker saying that the firm made a mistake, but don’t send it to the IRS.
There’s more information about this process in Instructions for Form 5329.
Reference: Kiplinger (March 22, 2019) “How to Correct a Mistake on Your RMDs from IRAs”