A missed required minimum distribution used to carry one of the harshest penalties in the tax code. That changed for good starting with the 2023 tax year, when the excise tax on an undistributed RMD dropped from 50 percent of the shortfall to 25 percent. The lower rate applies automatically to IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts subject to the same withdrawal rules, and it can drop further for account owners who move quickly to fix the mistake.
The SECURE 2.0 Excise Tax on Missed RMDs
Required minimum distributions are the minimum amounts the Internal Revenue Service requires an account owner to withdraw each year from most tax-deferred retirement accounts, generally beginning at age 73 under current law. When an account owner withdraws less than the full required amount by the deadline, the shortfall becomes subject to a federal excise tax rather than an ordinary late fee. For taxable years beginning after December 29, 2022, the enactment date written into the SECURE 2.0 Act, that excise tax fell from 50 percent of the shortfall to 25 percent.
The change requires no election or extra paperwork to receive the lower rate; it applies by default to every missed distribution going forward. The Internal Revenue Service confirms the mechanics directly: the tax equals 25 percent of the amount by which the required distribution for the year exceeds what was actually distributed, a formula spelled out in the agency’s retirement plan and IRA required minimum distributions FAQ. The excise tax reaches only the missed portion of the withdrawal, not the account’s full balance or the rest of that year’s RMD. The rule reaches beneficiaries of inherited IRAs as well, since those accounts carry their own required distribution schedules under the same set of statutory provisions.
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The Two-Year Correction Window That Cuts the Tax to 10%
The 25 percent rate is not necessarily the final number. SECURE 2.0 also added a correction provision: an account owner who withdraws the missed amount and reports it within a defined correction window sees the excise tax cut in half again, to 10 percent of the shortfall. That window generally runs through the end of the second tax year following the year the distribution was missed, though it can close earlier if the IRS mails a notice of deficiency or assesses the tax first. The clock starts running from the original RMD due date rather than from the date the mistake is discovered, so a shortfall that goes unnoticed for a year is already partway through the window by the time it surfaces.
Timing, not the size of the shortfall, determines which rate applies. An account owner who misses a $4,000 distribution and corrects it inside the window owes $400 rather than $1,000; waiting past the window locks in the higher 25 percent rate on that same shortfall. Custodians do not automatically alert the IRS to a missed RMD, so identifying and fixing the error falls to the account owner, starting with the same form used to report the shortfall in the first place.
Filing Form 5329 to Report or Fix a Missed Distribution
An account owner who misses part or all of a required distribution reports it on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, filed with that year’s federal income tax return. The instructions for Form 5329 walk through how to calculate the shortfall, apply the correct excise tax rate, and claim the reduced 10 percent rate when the correction window has been met. The form asks for the amount that should have been withdrawn, the amount actually withdrawn, and the resulting difference.
Custodians typically do not amend a prior year’s 1099-R to reflect a late RMD; the corrective withdrawal is instead reported as ordinary income in the year it is actually taken, separate from the excise tax calculation filed for the year the distribution was originally due. That distinction catches some filers off guard, since taking the missed withdrawal late does not erase the earlier shortfall from the IRS’s perspective, and both the late withdrawal and the excise tax filing still need to happen. Account owners who manage more than one IRA should identify precisely which account produced the shortfall, since the excise tax calculation on Form 5329 is tied to the specific account and year involved, not to the account owner’s combined IRA balance.
Reasonable-Error Waivers and When the IRS Grants Them
The excise tax can be waived in full or in part in some circumstances. The IRS allows relief when an account owner establishes that the shortfall resulted from reasonable error and that reasonable steps are being taken to remedy it. Qualifying requires filing Form 5329 along with a letter explaining what went wrong, submitted alongside proof that the missed amount has since been withdrawn rather than as a follow-up afterward.
Common reasonable-error explanations include a custodian’s calculation mistake, a serious illness that delayed action, or confusion following the death of an account holder that shifted RMD responsibility to a beneficiary who was unaware of the deadline. The IRS reviews these requests case by case rather than granting automatic relief, and its guidance on correcting RMD failures emphasizes that the corrective distribution should already be complete by the time the waiver request is filed, not promised as a future step. A beneficiary who inherited an account mid-year and missed the original owner’s outstanding RMD for that year can also seek relief under the same reasonable-error standard, provided the shortfall is made up promptly once discovered.
This article was produced with AI assistance and reviewed by The Financial Wire editorial team.
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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.
