Retirees who miss a required withdrawal from a traditional IRA, 401(k) or similar retirement account face one of the tax code’s steepest automatic penalties: an excise tax of up to 25% on the amount that should have come out but didn’t, according to the IRS. The rule applies once an account owner turns 73, and it does not require intent — a miscalculation, a custodian error or plain forgetfulness triggers the same tax as a deliberate skip. The IRS also built two ways to shrink or erase that 25% hit, but both depend on the account owner acting before the agency does.
How the IRS Calculates the 25% Shortfall Tax
Required minimum distributions apply to traditional IRAs, SEP and SIMPLE IRAs, and most employer retirement plans, including 401(k), 403(b) and 457(b) accounts, once the owner reaches age 73. Roth IRAs and designated Roth accounts are exempt while the original owner is alive, though beneficiaries of those accounts are still subject to RMD rules. Workers still employed by the plan sponsor can sometimes delay their RMD until the year they retire, but that delay does not apply to IRA owners or to anyone who owns 5% or more of the business running the plan.
The 25% figure is not applied to an entire account balance — it is assessed only on the shortfall between the RMD that should have been withdrawn and the amount actually taken by the December 31 deadline. The IRS’s retirement-plan FAQ page states that a missed distribution may be subject to an excise tax of 25%, 10% if the RMD is timely corrected within two years. An account owner who needed to withdraw $20,000 for the year but took only $12,000 would owe the tax on the missing $8,000, not the account’s full value, and it is charged separately from the ordinary income tax eventually owed on the withdrawal itself.
The obligation to get the number right rests with the account owner, not the bank or brokerage holding the money. An IRA custodian or plan administrator may calculate the RMD as a courtesy, but the account owner remains responsible for taking the correct amount on time. A custodian’s software error, a missed cost-basis adjustment, or an account that was never coded for automatic withdrawals can all produce a shortfall the account owner never intended, and the excise tax applies regardless of whose mistake caused it.
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The Two-Year Window That Cuts the Penalty to 10%
The IRS does not treat every missed RMD as a permanent 25% loss. The excise tax drops to 10% once the account owner corrects the shortfall by withdrawing the missing amount within two years of the year the distribution was originally due. That two-year clock runs from the original due date, not from whenever the mistake is discovered, so the window is already narrowing even if nobody notices the shortfall right away.
Correcting the shortfall does not end the paperwork. The account owner must still file Form 5329, Additional Taxes on Qualified Plans, with the federal tax return for the year the full RMD was originally required, reporting the excise tax due on the amount that was missed. Skipping that filing does not make the shortfall disappear from the IRS’s records; retirement account custodians report distributions to the agency each year, which is typically how a missed RMD comes to the IRS’s attention in the first place.
The 10% rate is not automatic relief from filing — it is a lower rate available specifically because the taxpayer corrected the mistake inside the two-year window and reported it. Waiting past that window, or never withdrawing the missed amount at all, leaves the original 25% rate in place, since the IRS has no separate reduced tier for corrections made in year three or later. At that point, the only remaining route to a lower bill is a discretionary waiver, not a scaled-down penalty.
The Reasonable-Cause Waiver That Can Erase the Tax Entirely
Beyond the automatic 10% reduction, the IRS allows the entire excise tax to be waived if the account owner can show the shortfall happened because of reasonable error and that reasonable steps are being taken to fix it. That request also runs through Form 5329, attached to a written letter of explanation describing what went wrong and what the taxpayer did once the mistake surfaced.
The instructions accompanying that form describe how the IRS reviews a waiver request: the agency looks at whether the taxpayer promptly withdrew the missed amount once the error was caught, and whether the circumstances behind it — a serious illness, a custodian’s failure to make a required payment, or a similar breakdown outside the taxpayer’s control — genuinely explain why the deadline was missed. A waiver is a request, not a guarantee, and the IRS can still bill the account owner for the full 25% if the explanation does not hold up.
The two remedies point to the same practical lesson: the RMD deadline itself is less dangerous than what happens after it slips. An account owner who misses the December 31 cutoff but withdraws the money and files Form 5329 within two years owes 10% on the shortfall. One who catches the same mistake after the two-year window, or does not catch it until an IRS notice arrives, is exposed to the full 25%, with only a discretionary waiver standing between them and the larger bill.
Custodians are not required to flag a missed distribution before the deadline passes, which leaves the practical safeguard with the account owner: confirming, before December 31 each year, that the RMD for every traditional IRA, 401(k) or similar account has actually been processed, not merely calculated. That single check is the difference between a routine annual withdrawal and a shortfall that, under the IRS’s own rule, can cost a quarter of the amount that should have come out in the first place.
This article was researched and drafted with the assistance of artificial intelligence.
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