I’m 73, retired and take my RMDs. But what happens if I become incapacitated and miss them for several years?



Dear MarketWatch, 

What happens if a taxable traditional IRA doesn’t have the required minimum distribution taken for three, four or more years? The 50% penalty has been reduced to 25%, possibly to 10% if corrected in a “timely manner.”

I’m 73 and retired in 2006. Last year and this year I started taking more than the RMD. However, I began thinking of what if I’m incapacitated for three or more years, then recover, and for that period there were not any RMDs distributed?

Question 1. Does the 25% penalty apply plus the tax rate for the year the RMD was supposed to have been taken, even if taken five years later, or a 25% penalty plus tax rate when finally taken? 

Question 2. Same as question 1, only if I died after 5 years? My wife would inherit my IRA 100% and she starts taking distributions.

I know that has happened to relatives. 

Thanks.

See: I’m 72, have $3 million in savings, and want to live with my son when he’s married with children. Can I afford two apartments?

Dear reader, 

You have very valid questions, and as you’ve said, I am absolutely sure this has been a situation many other people have found themselves in. And you’re right, the penalty for missing RMDs has been reduced — but still, who wants that?

First, I want to note that there are many investment firms that will help you set up automatic withdrawals related to your RMD. Individuals are responsible for their RMDs, but they can choose to have them automatically calculated and distributed. To do that, reach out to the plan provider.

In regards to incapacitation, one of your greatest protections in that type of scenario could be a power of attorney, which gives legal authority to another individual to handle your financial affairs in the event you’re unable to do so. You should communicate clearly and often with the trusted person you choose to have that authority, and also be concise in what you allow within the legal document. 

A qualified estate attorney can help you draft that document, and if you choose one who works in your area they would know the rules for your state and locality. You may be able to have multiple powers of attorney, but clearly describe how you want your affairs handled, such as these individuals making joint decisions on your behalf, or someone acting as a backup for the first person. 

Also check with your IRA custodian before setting up a power of attorney, as they may have their own rules and procedures for handling these financial accounts, Joe Cicchinelli, IRA technical expert, wrote on IRAHelp.com. You can also reign in what authority the power of attorney gives, such as limiting withdrawals to just RMDs. 

Whether your wife holds the power of attorney or not, she should strongly consider having her own power of attorney, so that her affairs are in order, too. 

If an RMD is missed, penalties could potentially be waived, said Sergio Garcia, a certified financial planner at Frontier Investment Management. The individual would have to file Form 5329 from the Internal Revenue Service for the year the RMD was missed, and include a letter of explanation that clearly describes the reason why the distribution was missed and any steps that were taken to fix the error. 

As for your second question, the beneficiary would be required to take the RMD if you had died before doing so. 

“In this situation the beneficiary receives the RMD and is also taxed on the distribution. Only if the original IRA owner had named their estate as a beneficiary would the estate receive the distribution,” Garcia said. “In either case, if the RMD is not satisfied by the due date, a penalty may still apply.”



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