Retirees and inherited-account holders who fail to withdraw their full required minimum distribution from an IRA or qualified retirement plan by December 31 will owe the IRS an excise tax equal to 25 percent of the shortfall. That rate, cut from a prior 50 percent penalty under the SECURE 2.0 Act enacted in December 2022 as Division T of Public Law 117-328, still represents a steep cost for anyone who miscalculates or simply forgets. A separate correction window can reduce the hit to 10 percent, but the clock on that relief is tight, and the IRS has published limited data on how many taxpayers actually use it.
Why the December 31 RMD deadline carries a 25 percent price tag
Under Section 4974, when the amount distributed from a retirement account during a taxable year falls below the minimum required distribution, the IRS imposes an excise tax equal to 25 percent of the gap. That penalty applies to traditional IRAs, 401(k) plans, 403(b) accounts, and other qualified plans. The only general timing exception is for a person taking a first-year RMD, who may delay until April 1 of the following year. Everyone else must receive the full distribution by year-end, as the agency’s RMD guidance confirms.
Before SECURE 2.0, the excise tax stood at 50 percent, a rate so punitive that many tax practitioners viewed it as a de facto enforcement tool rather than a revenue measure. Section 302 of the SECURE 2.0 Act halved that rate to 25 percent, and Congress added a further incentive: if a taxpayer corrects the shortfall within a statutory two-year window, the tax drops to 10 percent. The question is whether the lower penalty weakens the urgency to withdraw on time or whether most account holders never knew the old rate existed in the first place.
One hypothesis worth tracking is whether automated IRS notices about RMD shortfalls drive higher correction rates than self-monitoring. The 25 percent rate is low enough that some retirees may treat the risk casually, yet a formal notice from the agency could still prompt rapid action. No public IRS enforcement data currently confirms or refutes that pattern, but the structure of the correction window suggests Congress anticipated that many shortfalls would be caught after the fact rather than prevented beforehand.
How SECURE 2.0 and IRS guidance reshaped the penalty structure
The legislative record is clear on the mechanics. H.R. 2617, the Consolidated Appropriations Act of 2023, included the SECURE 2.0 Act as Division T. Section 302 of that law explicitly reduced the excise tax for failing to satisfy RMD requirements from 50 percent to 25 percent and established the 10 percent reduced rate for timely corrections. The IRS later summarized this framework in an Internal Revenue Bulletin, describing how the amended Section 4974(a) now applies to missed distributions and how taxpayers can qualify for the lower excise tax by fixing the shortfall within the prescribed window.
Behind those statutory rules sits a more technical layer: the regulations that define how to calculate a required minimum distribution in the first place. The Treasury regulations under section 401, including the detailed rules in Treasury regulation 1.401-9, explain concepts such as life expectancy tables, designated beneficiaries, and the timing of distributions from qualified plans. These regulatory definitions matter because the size of the RMD determines the size of any potential shortfall-and therefore the base on which the 25 percent or 10 percent excise tax is computed.
SECURE 2.0 did not rewrite the core mechanics of how RMDs are calculated, but it did adjust the age at which many taxpayers must begin taking distributions and clarified treatment for inherited accounts. Those changes, combined with the reduced penalty, create a new compliance landscape. Taxpayers who misunderstand when their first RMD is due, or who misapply the rules for beneficiaries, may now face a smaller but still meaningful excise tax if they come up short.
Practical implications for retirees and heirs
For retirees, the combination of a firm December 31 deadline and a 25 percent excise tax keeps RMD compliance near the top of year-end planning tasks. Even with the possibility of a reduced 10 percent rate, the cost of inattention can be hundreds or thousands of dollars. Financial institutions typically provide RMD calculations, but account holders remain responsible for ensuring that the correct amount is actually withdrawn on time across all relevant accounts.
Inherited-account holders face additional complexity. They must navigate both the general RMD framework and special rules for beneficiaries, including potential 10-year payout requirements and separate life expectancy calculations. An error in any of these areas can trigger the same excise tax under Section 4974, even when the beneficiary believes they are following the rules.
The reduced penalty under SECURE 2.0 represents a policy shift toward a somewhat less punitive approach, but it does not eliminate the financial sting of a missed RMD. Until the IRS releases more comprehensive enforcement data, it will remain unclear whether the lower rate and correction window meaningfully change taxpayer behavior. For now, the safest course for retirees and heirs is to treat the December 31 deadline as immovable and to view the 10 percent reduced excise tax as a last-resort safety valve rather than a planning tool.
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.
