Missing a single withdrawal deadline on a traditional IRA or 401(k) can cost a retiree a quarter of the amount they were supposed to take out, and the deadline arrives every year without a reminder notice from the IRS. The rule is old, but it still catches savers who assume a late withdrawal is a minor paperwork problem rather than an excise tax.
The Excise Tax: 25 Percent, or 10 Percent If Fixed in Time
Once an account owner reaches age 73, the tax code requires an annual withdrawal from most traditional retirement accounts — the required minimum distribution, or RMD. Miss it, or withdraw less than required, and the shortfall is subject to an excise tax of 25 percent under the current rules. The rate drops to 10 percent if the account owner corrects the shortfall within the IRS’s two-year correction window.
The penalty applies to traditional IRAs, SEP and SIMPLE IRAs, 401(k)s, 403(b)s, 457(b)s and most other defined contribution plans, according to the IRS’s own retirement topics guidance on required minimum distributions. The penalty does not apply to Roth IRAs or designated Roth accounts during the original owner’s lifetime, though beneficiaries of those accounts can still be on the hook for RMD rules.
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Form 5329 and the Two-Year Correction Window
A missed RMD does not resolve itself once the account owner withdraws the overdue amount. The IRS requires the shortfall to be reported on Form 5329, filed with the federal tax return for the year the full RMD was due but not taken, according to the agency’s RMD frequently asked questions. Filing that form is what allows the lower 10 percent rate to apply when the correction happens inside the two-year window; without it, the account owner has not formally told the IRS the shortfall was fixed.
A separate withdrawal in excess of one year’s RMD cannot be carried forward and applied to a future year’s requirement — each year’s distribution has to stand on its own, which means catching up a missed year does not create a credit against next year’s withdrawal.
When the IRS Will Waive the Penalty Entirely
The excise tax is not automatic once a shortfall is caught. The IRS says the penalty may be waived if the account owner can show the shortfall was due to reasonable error and that reasonable steps are being taken to fix it — a request made by filing Form 5329 along with a letter of explanation. A death in the family, a serious illness, incorrect information from a plan administrator, or a genuine calculation mistake have all been treated as grounds for that relief in practice, though the IRS decides each request individually rather than granting it automatically.
Why Age 73 Isn’t the Deadline for Everyone Still Working
The age-73 trigger has one common exception: a participant in a workplace plan such as a 401(k) or 403(b) who is still working and does not own 5 percent or more of the sponsoring business can generally delay RMDs from that specific employer’s plan until the year they actually retire. That delay does not extend to IRAs, including SEP and SIMPLE IRAs, which require withdrawals starting at 73 regardless of employment status — a distinction that trips up savers who assume “still working” covers every account they hold.
The Penalty Outlives the Original Account Owner
The same excise tax structure follows an account after the original owner dies. For most retirement accounts inherited after 2019, the IRS generally requires the entire balance to be distributed to the beneficiary within ten years of the owner’s death, with exceptions for a surviving spouse, a minor child, a disabled or chronically ill beneficiary, or a beneficiary not more than ten years younger than the original owner. A beneficiary who misses required withdrawals inside that ten-year window can face the same 25 percent excise tax on the shortfall that applies to the original account owner — meaning the penalty is a household risk that can extend well past the year an IRA or 401(k) owner personally turns 73.
Meeting a December RMD Deadline
An RMD shortfall is rarely deliberate — it is usually a missed December 31 deadline, a spreadsheet that used the wrong year-end balance, or an account nobody remembered to include in the total.
The Retirement Tax & Withdrawal Planner is a 12-page planner with four calculators covering provisional income, IRMAA tier, RMD schedule and Roth bracket fill, alongside the account withdrawal order.
Check an RMD schedule before December with The Retirement Tax & Withdrawal Planner.
This article was reported and written with the assistance of AI tools and reviewed by The Financial Wire editorial team.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
