November 23, 2021

Year-End RMD Preparation

As most IRA sponsors will attest, many IRA owners choose to wait until year-end to take their required minimum distributions (RMDs). Although IRA sponsors are required to send a statement in January to each IRA owner who is required to take an RMD for that year, the IRA owner is ultimately responsible for taking their RMD by their deadline. IRA sponsors should review their policies and procedures to ensure that RMDs are paid by the deadline as instructed by the IRA owner, and determine if the IRA sponsor’s default decision is to pay the RMD or not for the year if no instructions from the IRA owner are on file. If less than the RMD amount is distributed by the deadline, the IRA owner will be subject to the IRS 50% excess accumulation penalty on the undistributed amount of the RMD.


Notification of RMD Payment


Beyond the January RMD notice, IRA sponsors are not required to provide additional information regarding RMDs. However, last year, because of the CARES Act waiving RMDs for 2020, IRA sponsors generally had to send an additional notice to IRA owners informing them that RMDs were waived for 2020. For 2021, RMDs were not waived, so no additional notice beyond the January RMD notice is required.

For better customer service, some IRA sponsors contact those IRA owners who have not given the IRA sponsor instruction to distribute the RMD or have not notified the IRA sponsor that they waive taking their RMD from this IRA and will instead take it from an IRA with another IRA sponsor.


Default RMD Payment Policy


In a perfect world, every Traditional, SEP, and SIMPLE IRA owner who is age 72 or older in the current year will have communicated their intent to take their RMD from their IRA sponsor, or will have provided notice that they intend to aggregate their RMD and take it from another IRA sponsor. For those IRA owners who fail to provide RMD instructions, the IRA sponsor should have a default policy to distribute the RMD automatically or not. If the default is to pay out the RMD, the distribution would generally be subject to 10% federal income tax withholding. The IRA sponsor’s default may be to not automatically distribute the RMD amount. However, the IRA sponsor’s policy regarding a default RMD payment should be communicated to the IRA owner in writing in advance of any distributions.