Americans who turned 73 this year face a hard deadline: withdraw the required minimum distribution from their retirement accounts by December 31 or owe the IRS an excise tax equal to 25% of the shortfall. That penalty, set by the SECURE 2.0 Act of 2022, replaced the older 50% rate but still represents a steep cost for retirees who miss the cutoff or withdraw too little. A lesser-known provision drops the tax to 10% if the error is corrected within a defined window, creating a two-tier penalty system that many account holders have yet to learn about.
Why the December 31 RMD Deadline Carries Real Financial Risk
The mechanics are straightforward but unforgiving. Once a person reaches age 73, the IRS requires annual withdrawals from traditional IRAs, 401(k)s, and most employer plans that allowed pre-tax contributions. According to the IRS overview of required minimum distributions, the minimum amount is calculated by dividing the prior year-end balance by a life-expectancy factor from the Uniform Lifetime Table. Plan administrators typically handle the math for 401(k)s and similar plans, but IRA owners must ensure their own calculations and withdrawal requests are accurate and timely.
There is one narrow exception to the year-end cutoff. Retirees taking their very first RMD can delay that initial payout until April 1 of the following year. The IRS cautions in its RMD frequently asked questions that doing so generally means two taxable distributions in the same calendar year, which can increase adjusted gross income and potentially trigger a higher marginal tax rate, Medicare surcharges, or reduced deductions and credits. Every RMD after that first one must be taken by December 31, with no further grace period.
The financial risk of missing the deadline is twofold. First, the retiree still owes income tax on the distribution that should have been taken. Second, the excise tax under Section 4974 is calculated on the shortfall itself, not just on any unpaid income tax. For someone who was required to withdraw $20,000 but took only $5,000, the $15,000 gap could generate a $3,750 penalty at the 25% rate. Even if the error is later corrected, the timing determines whether that cost can be reduced.
The question of whether smaller-balance retirees will respond differently to the reduced 10% correction-window penalty is worth examining. In theory, a lower cost of fixing a missed distribution could encourage more timely compliance among people whose accounts hold less. But no public IRS enforcement data or plan-administrator records confirm that pattern. Without correction-window usage rates or account-level compliance statistics, the hypothesis remains untested. The behavioral incentive exists on paper; whether it changes real-world behavior is an open question that available evidence cannot answer.
How SECURE 2.0 and Section 4974 Restructured the Penalty
Congress enacted SECURE 2.0 as Division T of H.R. 2617 during the 117th Congress, raising the RMD starting age from 72 to 73 and revising the excise tax under 26 U.S. Code Section 4974. The statutory text sets the standard penalty at 25% of the amount by which the actual distribution falls short of the required amount. That figure applies automatically unless the taxpayer qualifies for a reduction and claims it properly on their tax return.
The reduction path was detailed in guidance published in Internal Revenue Bulletin 2024-19, which confirmed that the excise tax drops to 10% when the shortfall is corrected within the allowed correction window. The bulletin defined the parameters of that window, giving retirees a structured timeline to fix the error and claim the lower rate. Taxpayers who miss both the original deadline and the correction window face the full 25% charge, reported on Form 5329.
Procedurally, the excise tax is not settled through ordinary withholding on the late distribution. Instead, retirees must file Form 5329 with their income tax return, calculating the shortfall and the corresponding penalty. The IRS’s online account system, accessible through its secure login portal, allows taxpayers to monitor assessments, payments, and any posted penalties, but it does not replace the need to file the required forms. For those who discover an error, documenting when the missed RMD was made up and how the shortfall was resolved is critical to support application of the 10% rate.
Planning Around a Tougher but More Flexible Regime
The new penalty structure is harsher than many retirees realize, even with the lower 10% option. A 25% excise tax on top of ordinary income tax can quickly erode savings, especially for those who rely on multiple IRAs or have left old 401(k) balances scattered across former employers. At the same time, the codified correction window gives conscientious taxpayers a clearer path to limit the damage when honest mistakes occur.
Financial planners increasingly urge clients nearing age 73 to inventory all tax-deferred accounts well before year-end, coordinate RMDs across institutions, and consider setting up automatic withdrawals pegged to the minimum amount. For retirees who still miss a deadline, prompt action-taking the remaining distribution, filing Form 5329 correctly, and keeping records that align with IRS guidance-can mean the difference between a manageable 10% hit and a far more painful 25% charge.
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.
