Retirees who turned 73 in 2025 and failed to pull money from a 401(k) or IRA by April 1, 2026, now owe the IRS an excise tax equal to 25% of the amount they should have withdrawn. That penalty, set by the SECURE 2.0 Act of 2022 (Public Law 117-328), replaced a steeper 50% rate that had been in place for decades. The clock is running for anyone who has not yet taken a first required minimum distribution, and the cost of inaction hits retirement savings directly.
Why the 25% penalty on missed 401(k) withdrawals matters right now
The obligation to take required minimum distributions begins at age 73, according to IRS guidance. Anyone who reached that age in 2025 must complete a first withdrawal by April 1, 2026. After that initial deadline, each subsequent year’s distribution must be taken by December 31. Missing either date triggers the excise tax on the full shortfall, meaning the difference between what was required and what was actually withdrawn.
Congress cut the penalty from 50% to 25% through Division T of the Consolidated Appropriations Act, 2023, the section commonly known as the SECURE 2.0 Act. That same law created a further reduction: account holders who correct a missed distribution within a defined correction window owe only 10% on the shortfall instead of 25%. The two-tier structure was designed to reward quick action while still discouraging neglect. Whether the lower rate actually changes retiree behavior at scale is an open question. No public IRS enforcement data yet shows how many taxpayers have corrected errors under the new framework compared with the old 50% regime. A meaningful test would compare timely-correction rates among retirees who received direct IRS notices citing the 25% rate against those who relied solely on plan statements, but anonymized notice-response data of that kind has not been released.
Regulatory machinery behind the RMD excise tax
The penalty is not just statutory language sitting in a bill. Treasury and the IRS finalized a regulation governing required minimum distributions under RIN 1545-BP82, a rulemaking the Government Accountability Office classified as a major rule. That designation means the rule met thresholds for economic significance, confirming that the federal government treats RMD enforcement as a high-impact regulatory action. The underlying tax mechanics appear in 26 CFR 54.4974-1, which spells out how the excise tax applies when actual distributions fall short of the required amount and how the 10% reduced rate works when correction requirements are satisfied.
For account holders, the practical sequence is straightforward but unforgiving. A plan custodian or IRA trustee calculates the RMD based on the prior year-end account balance and IRS life-expectancy tables. If the owner does not withdraw at least that amount by the deadline, the excise tax applies to every dollar of the gap. Taxpayers who discover the error quickly can take the missed distribution, file the appropriate return, and seek the reduced 10% rate by showing that they corrected the mistake within the statutory window.
How retirees find out they missed a required distribution
In many cases, retirees first learn about a missed RMD when the IRS sends a notice describing the shortfall and the excise tax due. Those notices are delivered through the agency’s online account system as well as by mail, and they typically reference the tax year, the retirement account involved, and the amount the IRS believes should have been withdrawn. Some taxpayers instead spot the problem on their own when reviewing plan statements or tax forms such as Form 1099-R, which reports distributions from retirement accounts.
Because the penalty is calculated as a percentage of the missed amount, even a modest oversight can be costly. A retiree who should have withdrawn $20,000 but took nothing faces an initial $5,000 excise tax at the 25% rate. Correcting the error in time can reduce that to $2,000 at the 10% rate, but the retiree must still pay regular income tax on the late distribution itself. The combination of ordinary income tax and the excise tax can significantly erode savings that were meant to support spending in later years.
Steps to correct a missed RMD and limit damage
Once a missed distribution is identified, the first step is usually to contact the plan custodian or IRA trustee and request the overdue withdrawal. Many financial institutions have internal procedures for processing late RMDs and can help calculate both the original required amount and any additional distribution needed if account values have changed. Taking the distribution does not eliminate the excise tax, but it is a prerequisite for qualifying for the reduced 10% rate.
After the distribution is made, taxpayers generally need to address the excise tax on their return. The IRS encourages individuals to work with a preparer or advisor familiar with retirement-plan rules, and practitioners can access tools and instructions through the agency’s tax professional resources. In some situations, the IRS may abate or reduce the penalty if the taxpayer can demonstrate that the shortfall was due to reasonable error and that steps are being taken to prevent it from happening again, but such relief is not guaranteed and depends on the facts of each case.
Taxpayers who receive a bill for unpaid excise tax and disagree with the calculation can review their balance and payment options through the IRS’s account balance portal. That system allows individuals to see how much the IRS believes they owe, confirm whether recent payments have posted, and, if necessary, set up a payment plan. While installment agreements do not reduce the underlying excise tax, they can make it easier to manage cash flow after an unexpected liability.
Planning ahead to avoid future penalties
The most effective way to avoid the 25% excise tax is to build RMD checks into a broader retirement-income plan. Many retirees choose to schedule automatic withdrawals for later in the year, while others prefer to take distributions monthly or quarterly to smooth cash flow. Whatever the pattern, the key is to confirm that total withdrawals meet or exceed the required amount before December 31 each year after the first RMD.
Because the rules can change and individual circumstances vary, retirees and their families often benefit from periodic reviews with financial and tax professionals. Those conversations can address not only the mechanics of RMDs but also how distributions fit into overall tax brackets, Social Security benefits, and long-term spending needs. With the penalty now set at 25%, and 10% for timely corrections, the cost of ignoring RMD obligations is high enough that a modest investment in planning can pay for itself many times over.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
