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 a 25 percent excise tax on every dollar left sitting in the account beyond what was required. The penalty, set by the SECURE 2.0 Act for taxable years beginning after December 29, 2022, replaced the older and steeper 50 percent rate. That reduction sounds like relief, but it still means a retiree who fails to pull, say, $20,000 could owe $5,000 in penalties on top of ordinary income taxes.
The December 31 deadline and what triggers the 25 percent tax
Under Section 4974 of the Internal Revenue Code, the IRS levies a 25 percent excise tax on the shortfall between what a retiree actually withdrew and the minimum required distribution for that year. The calculation starts with the account balance as of the prior December 31. If someone held $500,000 in a traditional IRA at the end of 2023, the IRS life-expectancy tables determine the fraction that must come out in 2024. Any gap between that figure and the actual withdrawal triggers the penalty.
There is one narrow exception for first-timers. Retirees taking their very first RMD can delay it until April 1 of the year after they turn 73, according to the IRS distribution FAQs. But that delay creates its own trap: two taxable distributions land in the same calendar year, potentially pushing the retiree into a higher tax bracket. Every subsequent annual withdrawal after the first is due by December 31, with no extension.
The rules apply to each account type separately. For IRAs, owners must calculate and withdraw the RMD for every traditional, SEP, or SIMPLE IRA they hold, though they can aggregate those amounts and take the total from one or more IRA accounts. By contrast, RMDs from employer plans such as 401(k)s generally have to be taken from each plan separately. Retirees who changed jobs several times and left small balances in old plans can easily overlook one, inadvertently creating a shortfall and a penalty exposure.
How SECURE 2.0 changed the penalty math
Before the SECURE 2.0 Act took effect, the excise tax stood at 50 percent of the shortfall. Congress cut it to 25 percent, and for retirees who correct a missed distribution within a defined window, the rate drops further to 10 percent. That correction mechanism, described in Treasury regulations under 26 CFR Section 54.4974-1, gives account holders a second chance to fix mistakes without paying the full penalty. The law also raised the starting age for RMDs, shifting the “required beginning date” and reshaping cash-flow planning for older Americans.
According to a Congressional Research Service summary, SECURE 2.0’s RMD changes were designed to reflect longer life expectancies and to let savers keep money invested for more years before mandatory withdrawals begin. The lower excise tax fits that broader theme of easing punitive treatment for missteps, while still preserving a backstop that nudges retirees to draw down tax-deferred balances over time.
Whether the new 25 percent rate changes behavior remains an open question. Under the old regime, the 50 percent hit was so severe that many tax professionals treated it as a worst-case scenario few clients would ever face. A 25 percent rate is still painful, but it is less likely to prompt the same urgency. If more retirees delay or overlook their withdrawals because the consequence feels more manageable, the correction provision could see heavier use, and net excise-tax collections per person could decline even as the number of missed deadlines rises. No public IRS enforcement data for the 2024 cohort exists yet to confirm or reject that pattern.
What retirees holding IRAs and 401(k)s should do before year-end
The rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored defined-contribution plans such as 401(k) and 403(b) accounts. Roth IRAs owned by the original contributor are not subject to lifetime RMDs, but inherited Roth accounts generally are. Anyone turning 73 this year should first inventory every tax-deferred account that might carry an RMD obligation, including small legacy balances in past workplace plans.
Next, retirees should ask each financial institution for its calculated RMD amount, then verify that figure against the IRS life-expectancy tables or with a tax professional. Those who have already taken withdrawals earlier in the year can count those distributions toward the RMD, as long as the total meets or exceeds the required amount. If the year is nearly over and withdrawals have not yet been made, setting up an electronic transfer well before December 31 reduces the risk of processing delays that could technically leave the distribution in limbo as the calendar turns.
For anyone who discovers after the fact that they missed all or part of an RMD, the SECURE 2.0 correction window is crucial. Correcting the shortfall as soon as possible and documenting the mistake can support a request for the reduced 10 percent penalty rather than the full 25 percent. The IRS has historically had discretion to waive excise taxes when taxpayers show reasonable cause and promptly remedy the error, but relying on leniency is riskier than meeting the deadline in the first place.
Ultimately, the combination of a firm December 31 cutoff, a still-substantial excise tax, and more flexible correction rules makes RMD compliance a year-round planning task rather than a last-minute chore. Retirees who track their required withdrawals alongside quarterly estimated taxes, Social Security benefits, and other income streams are less likely to be surprised by a penalty-and more likely to use those mandatory distributions as part of a broader, deliberate strategy for spending down their savings.
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