[00:00:00] Hi, I'm Ed Slott and I'm Jeff Levine. And we're two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you, the saver, so that you can make better decisions because better decisions on the whole lead to better outcomes. And here's how we're going to do that. Each week, Jeff and I will debate the pros and the cons of a particular retirement strategy or topic.

With the goal of helping you keep more of your hard earned money. At the end of each debate, there's going to be one clear winner. You. A more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation to decide what's best for you and your family. So here we go.

Welcome to the Great Retirement Debate. Jeff, you ever forget anything? Uh, I am known to forget things from time to time, Ed. How about really important things? Uh, birthdays? Uh, even more important. Uh, doctor's appointments? Even more important. Alright, I got what's more important than a birthday or a doctor's appointment?

Well, we're on the Great [00:01:00] Retirement Debate. What's the most important thing? Getting that money out because you're forced to. They're called RMDs, required minimum distributions. I have not forgotten a required minimum distribution yet, Ed, because I have not been subject to a required minimum distribution yet.

But people do. And the theme here for today, what do you do should they be fixed? Hmm. All right. So, if we're going to dive into required minimum distributions and should they be fixed, we've at least got to start with a quick overview of those rules. Right. Right. So, from a required minimum distribution standpoint, The rules, you'd think, would be pretty straightforward, but we've actually changed the age in which they start several times over the last few years, thanks to the original SECURE Act, thanks to SECURE Act 2.

0, we started at 70 and a half not too long ago, then we went to 72, now we're at 73, in a few years from now we'll go to 75, who knows, by then maybe they'll have SECURE Act 7.0, 8.0, we'll be changing even again. Those are the starting ages for individuals who need to take RMDs. Today, as we sit [00:02:00] here, 73 years old, unless you happen to have like a 401k and you're still working, and you meet certain requirements, but for the overwhelming majority of people, age 73 is when required minimum distributions have to start.

But, to your point, sometimes people are a little forgetful, maybe they, you know, For the right reasons, people, for, you're talking about an older population, including me, I'm not there yet, but I understand, it's a whole change in the mindset, they've been accumulating, saving, contributing, and all of a sudden, the shift is, they're climbing down Mount Everest now, and it's a whole different psyche, and, uh, They say, well, I know I have to do something.

And it does sound easy to lots of people. That's age 73. And then they look at the table or they forget or they have a bunch of accounts and things happen. There's an illness, a death in the family. They're just confused. They get bad advice from a financial institution. You know, we always joke in our programs, uh, that, Financial institutions are supposed to give you your RMD amount, [00:03:00] but they're not required to give you the correct amount.

That's right. I say the same thing. That's right. They're required to calculate it, just not correctly. Yeah, it's, it's, it's pretty wild. I mean, all the different ways you can mess up a required minimum distribution. I always say there are four things, right? You've got a take the right account balance, use the right account balance, you have to use the right factor, you have to take it from the right account, and you got to do it at the right time.

And if you don't do any one of those four things right, you could be subject to an RMD shortfall penalty, right? And that's per account. If you're talking about IRAs, lots of people have more than one. Sure. And they forget about them, or they may have an IRA and a 401k, and maybe they're Require, have requirements from both.

It can get confusing and the problem is the penalties are severe. Some of the biggest penalties in the tax code. That's been changed. All right, so let's talk about that. Let's unpack that because not too long ago the penalty for missing a required minimum distribution was 50 %. Let me just stop you.

50 in case you didn't hear. 5-0. 50. It [00:04:00] sounds unheard of. A 50 % penalty on the amount you should have withdrawn, but didn't. That's right. So, today we've got a little bit of change, right, in that penalty, thanks to Secure Act 2. 0, but that's only on new MIST requirement of distributions, right? Yeah, we just had a case that told us the answer.

Uh, you could still be subject to the 50 % penalty for RMDs you didn't take before 2022. Alright, so what, what is, so, Clearing this up, right, and making this very explicit for those listening. If you didn't take an RMD before 2022, then at that point you'd be subject to a 50 % penalty and that penalty could still apply today for those missed previous RMDs.

Alright, so what's the new penalty for anybody who missed an RMD since then? Well, as you said, Secure 2.0 softened that, and they made it, brought it all the way down to only a 25 % penalty! Not [00:05:00] too bad, it's half of what 50 is, I guess. Oh, and it gets better. Wait, there's more. Oh, okay. Alright. It goes down to... you working for the IRS these days, Ed?

Yeah. Actually the IRS is pretty good on this. We'll see. We don't know yet. Let me just finish it. It went down to 25% and then to 10% under the same law. If you make up the missed distribution and pay the penalty within two years. Mm-Hmm, . So it can go as low as 10%. So here's the thing about the IRS, when it was 50%.

I think, my own opinion, I don't know for sure, I don't have inside information at the IRS, but I gotta believe that the powers to be at the IRS looked at that 50 % penalty and said, this could be my mother. I mean, I mean, we can't assess this. This is outrageous. We can't take half of a person's, uh, RMD as a penalty.

penalty. This is a horror show. So they rarely if ever assessed it. And when people ask for a waiver, they almost always got a waiver. I never saw a waiver [00:06:00] denied except in one rare case. Oh, I was gonna say the same thing. I've seen one. One. Maybe it's the same one. It's the same one where the people didn't know the laws or their advisors didn't, they asked IRS to assess the penalty for various reasons because they didn't understand the stretch IRA and thought they would lose one benefit, so they volunteered and asked IRS in a private letter, can we pay the penalty?

And IRS said, yeah, be my guest if you really want to. I saw one. I probably yeah. Over the years, I don't know, like you Ed, I've probably worked with, you know, thousands of people who have applied for relief, amazingly. Uh, but, the, I've seen one person where the IRS denied it, and it was where the person had done a whole bunch of other really shady stuff on their tax return.

I think the IRS was like, well, we're not so keen to give you a break. But, other than that, I mean, uh, like, any excuse, they were, you know, like, the dog ate my RMD and it was like, it was okay. Yeah, they didn't want to assess it. So now we have this 25 % or 10%, so I'm wondering, and we [00:07:00] don't know yet, how generous IRS will continue to be now that the penalty's only 10%.

I might be cynical, but I'd rather pay 50 % of nothing than ten percent of something. Yeah, it's a really fair question to ask. Will they continue to be as benevolent as they were? Oh, that's a better word. before, uh, you know, before these changes will occur and, and who knows, uh, maybe they will, maybe they won't.

But to, to your point, right, we've got this new regime where if you make a mistake, right, there are really two ways to potentially fix it. One is you, you pay it and then, you know, take out the money and then pay the penalty. The ten percent. The ten percent.. If you catch it within what they call the, uh, correction window, right, the, the technical name, which for most people is about two years.

Yup. Yup. And then the other way would be to try and apply for relief. But, there's a third way that some people consider from time to time. Well, let's go to the second way first. Okay. To file for relief, where you don't have to pay any penalty, not 25, not 10, but [00:08:00] zero. You file with your tax return form 5329 and request a waiver.

And that's the one that you were just talking about where IRS would almost always waive it for a legitimate good faith reason, like some of the ones I mentioned. So now you can go to, and they would waive it. And then you're, you're free. That could be filed every year, even for back years. Alright, there's a third way, right?

And, and the third way, and I'm not suggesting that this is the right way. To get a full waiver. Well, just a third way people might deal with it. Oh, oh, oh, I don't want to go there, but say what you're going to say. Well, we have to know? How are they going to know? I'll give you my standard answer. I know, I know, I've the guy next to me.

Yeah. No, no. That's how my, because when advisors ask us this, as you know, in seminars, well, how are they going to know? And I always give the same answer. I don't know how they're going to know. Ask the guy in the cell next to you. Yes. Well, I will ask him and hopefully it'll be you so we can continue recording these podcasts, you know?

Yeah. That's it. From our jail cell. But I [00:09:00] do have, in fairness, I've had clients over the years, it's so many years back, shouldn't we let sleeping dogs lie? Well, that's where I was going to go with this, right? At some point you realize like, oh, I missed two or three years or I forgot about this one. Account.

Should people really go back and still fix it at that point? Well, there, there are two schools of thought. You know, it brings up the topic of statute of limitations. So, this is a thorny topic because technically there was no statute of limitations before Secure 2.0 came in. So, just to clarify, when we say statute of limitations, basically how far back the IRS can go and assess a penalty.

Right. Right? If you say a statute of limitations is five years, Unless there's fraud, which we're not looking at here. No, that's not what we're talking about. Outright willful neglect or fraud, no. Right, we're talking about mistakes. We're talking about for good faith reasons. Yup. Then usually, in most things when it comes to the tax code, you've got a three year period.

You've got a six, you know, there's a six year period for certain other things. Right, right. But that is, it means if IRS doesn't figure it out in that time, you're [00:10:00] generally okay. You're probably okay. Yes. But, here's the thing, most people, even tax pros, don't understand how the statute works for RMDs. They understand the statute for your regular tax return, your 1040, three years.

If you file it, you figure, you're good. But if you didn't know, you missed an IRR, an RMD, an IRA, RMD, you wouldn't even know to file for a waiver. And you wouldn't know to file form 5329. And due to court cases from years ago, uh, IRS has won this case saying that if you don't file form 5329, the statute never begins to run because we consider that, or the courts consider it, a separate tax return.

So you could have people that have an open statute all the way back, and that could be pretty dangerous. Secure 2.0 fixed that problem somewhat by putting in a three year statute which could also be a six year statute depending on how you [00:11:00] handle it and what you attach to your return. So, the damage is somewhat limited going forward from 2022 or later, but the old years you're talking about are still open 5329.

Asking for the waiver because why would you if you didn't know you had a problem? That's right All right. So so effectively you're in a situation now where we've got this break in time. We've got to look at the old pre 2022 RMDs and we can look at the the post RMDs if it's a pre 2022 RMD Then we're looking at a scenario where there's still an unlimited amount of time that the IRS can generally go back and assess what was at that time, and continues to be for those RMDs, a 50 % penalty.

Going forward, two new benefits to taxpayers, one, the lower 25 % penalty, where if it's fixed timely, it drops even further to 10. And two, if you don't even do that, after three years for most people, So, that [00:12:00] penalty can't be enforced by the IRS, is that right? Well, it may turn out, because of the quirk and the way the law is written, it may turn out to be a six year statute of limitations, which means you'd have to take the back missed RMDs for the six years to, to get the, uh, ten percent item.

So let me ask you a question, Ed. In practice, not you, because you do things the right way. You know, Mary Smith, John Smith, CPA on the corner, client comes to them. What are they telling their client? They're probably telling him, look, let sleeping dogs lie. It was so many years ago, but as a professional, you have to say, well, that's out there, you know, you've got that cloud hanging over your head.

And I might tell people, you know, it's not the worst thing in the world to go back, clean it up, get peace of mind, because this money has to come out anyway. And you have low tax rates now. Maybe get it out and, uh, because it's going to come out anyway. And this way you could sleep at night and you never have a problem.

Yeah. I mean, the, the, the focus of [00:13:00] today's discussion, the ultimate question was, should you fix a missed RMD? And, and my answer, if, especially if we're talking about any of those old RMDs, the answer almost always. should be yes, because otherwise you never know that you're home free. There's an indefinite period of time where IRS can come back and, and people might even think, well, when I'm, when I'm dead, it will be, you know, the problem will go away.

That's not true. There's something called transferee liability, which means your heirs, you know, if you, if There's money distributed from your estate, your heirs or your executor, your, your trustee could end up having to pay those taxes on your behalf and that oftentimes could be your, your child or some other loved one in your household.

Yeah, that's a gray area. I don't know that that's ever been assessed because especially now, I wonder if they would even bother because the beneficiaries are going to empty the account in 10 years anyway. One only knows, right? But to me, if you can go back, and as we have said, the IRS has historically been pretty lenient, right?

There's a really good chance that your old [00:14:00] RMDs, if you give them any sort of reasonable excuse, they're going to waive them. Why not just do it and be done and eliminate any of the risk altogether, and going forward, fix it. The worst case scenario is you pay a ten percent penalty. If you do it in a timely manner, and you could still ask for the IRS relief after that.

For a complete waiver. That's right. For a complete waiver. And it's not a bad deal to go out, file the 5329. Just a warning. Before they will waive it, you must first take the backup document. The misdistributions, the shortfall, whatever you were short, you have to say you already made that up to get the complete waiver because on the penalty, uh, waiver request form, form 5329, you have to say something like whatever the good reason was, a death in the family, sickness or whatever.

I'm confused about the rules, advisor mistake, but I've already. made up the misdistribution. I'm asking for a waiver. So you have to first take the misdistribution to show good faith and then they will generally waive it. And I think that's going to be my own [00:15:00] personal opinion, the way IRS will handle it going forward because nobody wants to upset a lot of seniors who vote.

Yeah, I Agree, and it really doesn't have a good look right like yeah great grandma and grandpa who were like oh Where am I supposed to do it and they finally fixed the account? Yeah, it's like we're still gonna hit this penalty. So look at the end of the day, I think You fix it, as we both said, to sum up what you were talking about.

This way of fixing it is really, I always think about a three step process. Step one is take whatever back distributions you missed. If you missed multiple years, I like to have the custodian distribute it each year separately so I can show IRS those checks. for each year separately from the custodian.

You know, if I missed a 2020, uh, you know, RMD, I want to check for each of those years separately as opposed to one cumulative amount. But take those back distributions, that's step one. Step two, file form 5329. And technically, if you missed multiple years [00:16:00] of distributions, you're supposed to file. That's right.

Form 5329 for each of those years. And then three, Well, same way when you're a kid, right? You did something wrong and you wanted to get out of trouble. You got to promise not to do it again. So you got to send the IRS a little love note with form 5329 explaining what happened and then saying, you know, going forward, we're going to make sure we follow the rules.

And if you do that pretty good chance, you get. But here's the advice going forward, be more diligent or get professional help to make sure you have your full list of accounts. Uh, so you know where the RMDs are in each account and for IRAs, you could take it from anyone. But be more careful even if the financial institution, gives you a number.

Make sure they may only have one of your accounts. So make sure this may be an area you want to work with a professional or your accountant to make sure you at least made an attempt to get the right answer and take the right amount of the distribution. Yeah, I'll never forget years ago, Ed, there was that IRS report.

From the treasury inspector general on tax administration, uh, Shorten [00:17:00] TIGTA TIGTA. Yep, exactly. And he's basically like, yeah, nobody follows any of the rules. That was pretty much what the report says. Like everybody has an RMD mistake and look, naturally retirement accounts are tax favored. So the mistakes are typically on the order of people put too much money in and people take too little out, which is not surprising given again, that these are taxed preference accounts, but Ed, you know, Um, we've, we've given everything we can.

We've put everything into this episode. Well, there's a lot of changes. The age changes, the penalty changes, the statute of limitation changes. It's a lot for a senior, okay? It is. You're starting at 73. Uh, you may need professional help. Well, hopefully our listeners have taken that out. Not required, but we hope they have.

So with that, Ed, always a good time chatting with you about these topics. Thanks so much for another fun debate. All right. RMDs. Don't forget them. That's right. We'll see you next time on The Great Retirement Debate. Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners. This podcast is for informational and educational purposes only [00:18:00] and should not be construed as specific investment, accounting, legal, or tax advice.

Certain information mentioned may be based on third party information which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable but its accuracy and completeness cannot be guaranteed. The topic discussed in corresponding arguments are those of the speakers and may not accurately reflect those of Buckingham Wealth Partners.