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

My understanding is that there used to be a 50% penalty, but that has been reduced to 25% and, possibly, even to 10% if the error is corrected in a “timely manner” — that is, within two years.

Question 1: Does the 25% penalty apply, plus the tax rate for the year the RMD was due, even if it was taken five years later. Or is it a 25% penalty, plus tax rate for the period of time when the RMD is finally taken? 

Question 2: If I died after five years of failing to take my RMD and my wife inherited my IRA and started taking distributions, would she be subject to a 25% penalty on my behalf? I have relatives who experienced this.

Many thanks for your help.

Also 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 suggested, I am sure many other people have found themselves in this situation. And you’re right, the penalty for missing RMDs has been reduced — but still, who wants that?

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 or years 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.”

The good news: Many investment firms will help you set up automatic withdrawals related to your RMD. Individuals are responsible for their RMDs, but they can be automatically calculated and distributed. To do that, reach out to the plan provider.

Setting up a power of attorney

Regarding incapacitation, a power of attorney 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. Choose one who knows 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, including what joint decisions they could make on your behalf, and whether you appoint a backup.

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 rein in the authority given to your power of attorney, including 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.