Heirs who inherit an IRA and fail to take even one required minimum distribution now owe a 25% excise tax on the shortfall amount. That penalty drops to 10% if the missed withdrawal is completed within a two-year correction window. The stakes are straightforward but easy to overlook: a beneficiary who should have withdrawn $20,000 and did not faces a $5,000 tax bill, reduced to $2,000 only if the money comes out fast enough.
How a Single Missed Inherited IRA Withdrawal Triggers a 25% Tax
The penalty structure traces directly to Section 4974 of the Internal Revenue Code, which was amended by the SECURE 2.0 Act. Before that law, the excise tax on missed required minimum distributions stood at 50%. The revised statute cut the baseline rate to 25% of the shortfall and added a second tier: a 10% rate for beneficiaries who correct the mistake inside a defined window. That correction window runs for two years from the original deadline, according to IRS guidance on required minimum distribution rules.
The reduction from 50% to 25% might sound generous, but the dollar amounts still add up quickly for inherited accounts with six-figure balances. A beneficiary who inherits a $500,000 traditional IRA and misses a distribution calculated at $30,000 would owe $7,500 in excise tax at the 25% rate. Fixing the error within two years brings that down to $3,000, but the clock starts ticking on the original due date, not the date the beneficiary realizes the mistake.
Inherited IRAs also sit on top of already complex timing rules. Some heirs must follow a 10-year payout schedule, others face annual life-expectancy-based withdrawals, and some surviving spouses can effectively step into the original owner’s shoes. A missed required minimum distribution can occur simply because the beneficiary misread which set of rules applies. Yet the excise tax calculation does not adjust for confusion: the shortfall is measured against the correct required amount, whether or not the heir understood how that amount was determined.
One open question is whether custodians are doing enough to prevent these errors. Some firms send automated reminders ahead of distribution deadlines, while others leave it entirely to the account holder. No public IRS dataset currently tracks how many Form 5329 filings result from inherited accounts versus original-owner accounts, and no aggregated data yet shows whether custodian reminders produce higher correction rates. Two full filing seasons of post-SECURE 2.0 returns would be needed to test that pattern, and those seasons have not yet concluded.
Form 5329 and the Mechanics of Reporting the Penalty
Beneficiaries who miss a distribution must report the excise tax on Form 5329, the IRS return for additional taxes on qualified plans and other tax-favored accounts. The form requires the taxpayer to calculate the shortfall, apply the applicable rate, and pay the resulting tax. Beneficiaries who correct the shortfall within two years and want the reduced 10% rate also use Form 5329 to claim that lower amount.
The IRS allows taxpayers to request a full waiver of the penalty by attaching a written explanation showing that the shortfall resulted from reasonable error and that reasonable steps have been taken to fix it. But no public data from IRS service centers reveals how often these waiver requests succeed or what reasons the agency finds persuasive. That gap leaves beneficiaries guessing about whether filing for relief is worth the effort or likely to succeed, and it pushes many toward professional help to frame their explanations and documentation.
Filing logistics can add another layer of uncertainty. Taxpayers who discover a missed inherited IRA distribution for a prior year often need to submit a stand-alone Form 5329, separate from any amended income tax return. The form can be filed on paper with the IRS, but processing times are not publicly broken out for this specific penalty, and there is no dedicated online tool that shows the status of a pending Form 5329 submission.
Limited Visibility and Where Heirs Turn for Help
Because the excise tax is self-reported, the IRS typically sees only the cases that taxpayers or their advisers identify and disclose. Beneficiaries who are unsure whether a missed withdrawal has triggered the penalty sometimes start by checking general account information through the IRS’s online account system, though that portal does not calculate required minimum distributions or automatically flag inherited IRA shortfalls. Others look up payment histories or notices using the IRS’s balance lookup features to confirm whether any excise tax has already been assessed.
Given the stakes, many heirs ultimately ask a professional to review their situation and prepare Form 5329 and any waiver request. The IRS maintains a directory of licensed preparers and other credentialed practitioners through its tax professional search, which some beneficiaries use to find help with inherited IRA questions. Yet even experienced practitioners must work within the same information gaps: there is no published success rate for penalty waivers, and no formal checklist of explanations that the IRS will automatically accept.
Until more post-SECURE 2.0 data emerges, heirs who inherit IRAs face a system where a single missed withdrawal can trigger a sizable tax, relief is possible but opaque, and the best defense is still careful tracking of deadlines and prompt correction of any errors that surface.
