Retirees who miss a required minimum distribution from a traditional IRA or workplace retirement plan now owe the IRS 25% of the amount they failed to withdraw, a penalty cut in half from the old 50% rate. Those who catch the mistake and pull out the missing funds within two years owe only 10%. The changes, enacted through Section 302 of the SECURE 2.0 Act inside the Consolidated Appropriations Act of 2023, reset the financial calculus for millions of account holders approaching or past their RMD age, and the two-year correction window creates a new incentive structure that will likely reshape how taxpayers interact with IRS enforcement.
How the 25% and 10% RMD penalties replaced the old 50% rate
For decades, the penalty for falling short on a required minimum distribution was among the steepest in the tax code: 50% of the shortfall. Congress changed that when it passed H.R. 2617, the 117th Congress spending package that included SECURE 2.0 Section 302, which dropped the base excise tax to 25%. The statutory language now embedded in Section 4974 of the Internal Revenue Code also introduced a reduced 10% rate for taxpayers who correct the shortfall within a defined two-year window.
The practical difference is significant. A retiree who should have withdrawn $20,000 but took nothing would have owed $10,000 under the old regime. Under the current structure, that same person owes $5,000 at the 25% rate, or just $2,000 if the full $20,000 is withdrawn within two years of the original deadline. For retirees on fixed incomes, that gap can determine whether a mistake is merely painful or financially destabilizing.
That two-year window is the mechanism most likely to change taxpayer behavior. Before SECURE 2.0, the only path to relief from the 50% penalty was requesting a waiver from the IRS by filing Form 5329 and attaching an explanation of reasonable cause. The process was slow and uncertain, and some retirees never learned about it at all. Now, a taxpayer who simply takes the missed distribution within the correction period automatically qualifies for the 10% rate, no separate waiver request needed. This structural shift should produce a measurable rise in amended Form 5329 filings within 24 months of each tax year as account holders discover and fix shortfalls, a trend that will become visible in future IRS enforcement data if the agency publishes it.
What IRS guidance confirms about the correction window and waivers
The IRS has confirmed the new rates across multiple official channels. Its online retirement topics guidance states that the excise tax for failing to take enough of an RMD is 25% of the shortfall, and that it drops to 10% if the shortfall is withdrawn within two years. The agency’s separate RMD FAQs echo the same figures, underscoring that the reduced rates are not a temporary administrative concession but a permanent change in the law.
Separate from the automatic 10% reduction, the traditional waiver route still exists. Taxpayers who can show that an RMD shortfall was due to reasonable error and that they are taking steps to remedy it may ask the IRS to waive the excise tax entirely by filing Form 5329 and providing an explanation. In practice, this creates a three-tiered system: a 25% penalty for those who neither correct nor seek relief, a 10% penalty for those who correct within two years, and a potential 0% outcome for those who qualify for a waiver. The continued availability of waivers is especially important for retirees who discover errors after the two-year correction period closes or who face health or administrative barriers that delayed their distributions.
IRS publications make clear that taxpayers are responsible for tracking both the amount of their required minimum distributions and the timing. The agency’s guidance emphasizes that RMDs generally must be taken annually once a taxpayer reaches the applicable starting age, and that failing to do so triggers the excise tax on the undistributed portion. Financial institutions often provide reminders and calculation tools, but they are not legally liable for ensuring that distributions occur on time or in the correct amount. That reality makes the new penalty framework less about shifting responsibility and more about softening the consequences when individuals inevitably make mistakes.
How the new penalty structure may shape retiree behavior
Lowering the top penalty from 50% to 25% reduces the fear factor that once surrounded RMDs, but the two-year window introduces a more nuanced incentive. Retirees who miss a distribution now have a clear, quantifiable benefit to acting quickly: every month that passes inside the correction period preserves their eligibility for the 10% rate. Advisors and tax preparers are likely to build annual RMD checks into their workflows, knowing that catching a problem in the first or second year can save clients thousands of dollars.
At the same time, the existence of a reduced penalty could tempt some taxpayers to be more casual about compliance, particularly if they view 10% as an acceptable cost of temporary deferral. Whether that trade-off makes sense will depend on individual tax brackets, investment returns, and cash needs, but the IRS framing of the excise tax as a penalty rather than a planning tool suggests that using it strategically would be risky. For most retirees, the safer path will remain straightforward: calculate the RMD correctly, take the distribution on time, and treat the new rules as a backstop for honest mistakes rather than an invitation to experiment.
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