Retirees who turn 73 and forget to pull money from a traditional IRA or 401(k) face a federal excise tax that claims one quarter of the amount they should have withdrawn. The penalty, set at 25% of the shortfall under the Internal Revenue Code, applies to every dollar left sitting in the account past the annual deadline. A reduced 10% rate is available, but only if the account holder fixes the mistake within two years.
How the 25% excise tax on missed RMDs works
The penalty traces directly to Section 4974, which imposes an excise tax equal to 25% of the gap between what a taxpayer was required to withdraw and what was actually taken out. Someone who owed a $20,000 required minimum distribution and took nothing would owe $5,000 in excise tax on top of the regular income tax due when the funds are eventually distributed.
The SECURE 2.0 Act, enacted as Division T of Public Law 117-328, moved the starting age for required minimum distributions to 73 for the relevant birth-year cohorts. That same law also restructured the penalty regime. Before SECURE 2.0, the excise tax stood at 50% of the shortfall. The current 25% rate is itself a product of the 2022 legislation, and the IRS retirement page confirms that the rate drops further to 10% when the missed amount is corrected within a two-year window.
Missed distributions are reported on IRS Form 5329, which is filed alongside the taxpayer’s annual return. Final regulations published on July 19, 2024, at 89 FR 58886 spell out the mechanics of the correction window and how the agency administers it. Notice 2024-35, published in Internal Revenue Bulletin 2024-19, provides additional guidance referencing Section 4974 and the timeline for self-correction.
What the two-year correction window does and does not guarantee
The two-year fix is straightforward on paper: withdraw the missed amount, file Form 5329, and the excise tax drops from 25% to 10%. In practice, several questions remain open. No publicly available IRS data breaks down how many taxpayers have used the correction window since SECURE 2.0 took effect, and no aggregate figures exist showing total excise-tax collections tied to RMD shortfalls for the 2023 or 2024 tax years.
The IRS maintains online account portals for individual taxpayers, businesses, and tax professionals, accessible through its online account system. Whether filing electronically through those portals produces faster processing or lower effective penalty rates compared with mailing a paper Form 5329 is not documented in any published agency report. The absence of that data makes it impossible to confirm whether the method of correction changes the outcome for the taxpayer beyond simple convenience.
The final regulations from July 2024 define how the correction window ends, but the full operational detail of Notice 2024-35 has not been widely excerpted beyond its Internal Revenue Bulletin listing. Retirees and their advisers are working from the IRS retirement topics page and the regulatory text itself, with limited case-level guidance on edge situations such as multiple missed years, inherited accounts with complex beneficiary designations, or taxpayers who move between employer plans and IRAs during the same period.
Crucially, the two-year window does not operate as a blanket amnesty. The reduction to a 10% excise tax is automatic only when the taxpayer withdraws the full missed amount and reports it correctly within the prescribed time. If the correction is partial, or if the filing is incomplete, the statute still authorizes the 25% rate, and the IRS retains discretion to assess that higher penalty. The regulations describe how the agency determines whether a correction is “timely,” but they do not promise relief in every factual scenario.
Practical implications for retirees and advisors
For retirees approaching age 73, the new penalty structure raises the stakes for accurate RMD calculations. Financial firms generally offer RMD estimates, but the taxpayer is ultimately responsible for ensuring that the correct amount leaves tax-deferred accounts by the deadline. Missing the date by even a small margin can expose the entire shortfall to the excise tax, regardless of whether the oversight stemmed from confusion over the rules or administrative delays at a custodian.
Advisors now have to plan around both the initial obligation and the potential need for rapid correction. Because the two-year window begins when the RMD was originally due, not when the error is discovered, a retiree who waits to reconcile accounts may find that much of the correction period has already elapsed. That timing risk is particularly acute for households juggling multiple IRAs or 401(k)s, where a missed distribution from one account can be easy to overlook until tax preparation season.
The lack of granular IRS data also complicates planning. Without statistics on how often the excise tax is assessed, or how frequently taxpayers secure the reduced 10% rate, it is difficult to gauge how aggressively the agency enforces Section 4974 in practice. The regulations and notices outline the legal framework, but they do not reveal how examiners handle borderline cases, how often penalties are abated on review, or whether certain types of errors draw closer scrutiny.
Until more empirical information emerges, retirees and their advisors are left to treat the statutory 25% rate as a real and substantial risk. The two-year correction window offers meaningful relief for those who act quickly, yet it does not eliminate the need for meticulous tracking of RMD obligations. In the absence of detailed enforcement data, the safest course remains straightforward: calculate the required distribution accurately, take it on time, and reserve the reduced penalty provisions as a backstop rather than a planning strategy.
