Retirees who fail to pull money out of a traditional IRA or 401(k) on schedule face an excise tax equal to 25% of the shortfall. That penalty drops to 10% if the missed amount is withdrawn before the end of a defined correction window, which generally closes at the end of the second taxable year after the year the distribution was due. The gap between those two rates, 15 percentage points on what can be a five- or six-figure withdrawal, creates a high-stakes deadline that many account holders do not realize exists until a tax bill arrives.
How the 25% Penalty and the 10% Escape Valve Actually Work
The statutory framework sits in Section 4974 of the Internal Revenue Code, which imposes a 25% excise tax on the difference between what a taxpayer was required to withdraw and what was actually taken. If, for example, someone owed a $20,000 required minimum distribution and took nothing, the excise tax would be $5,000 at the full rate.
The same statute provides a reduced 10% rate when the account holder corrects the shortfall within the correction window. The IRS defines that window as ending at the close of the second taxable year that begins after the year the distribution should have been made. For a distribution missed in 2025, the deadline to qualify for the lower rate would fall at the end of 2027. Correcting means actually withdrawing the full shortfall amount before that date, not merely planning to do so or filing an amended return.
The regulatory details appear in an Internal Revenue Bulletin that restates the 25% baseline and the 10% alternative for taxpayers who meet the correction requirements. The regulation at 26 CFR Section 54.4974-1 spells out that the lower rate applies “in lieu of” the full penalty when those conditions are satisfied. In practice, that means the excise tax on a $20,000 shortfall drops from $5,000 to $2,000 if the taxpayer cures the omission before the window closes.
To actually claim the reduced rate, taxpayers generally must report the shortfall and the excise tax on Form 5329 and ensure that the corrected distribution is completed in time. The rules do not require the IRS to alert a taxpayer before the window expires, and there is no automatic waiver simply because the mistake was unintentional. The law instead relies on this two-tiered penalty structure to encourage prompt self-correction.
Why Automated IRS Notices Could Change Correction Rates
One open question is whether taxpayers who receive direct IRS contact about a missed distribution correct the error at higher rates than those who do not. Both groups technically have equal access to the 10% reduction, but awareness is uneven. Many retirees do not track RMD deadlines on their own, and custodians are not uniformly required to flag a missed withdrawal in real time. An automated notice from the IRS, arriving while the correction window is still open, could function as the single most effective prompt to act.
Without public data on how many taxpayers actually claim the reduced rate versus paying the full 25%, the effect of such notices is difficult to measure. The IRS does not publish aggregate statistics breaking down how many excise tax payments land at each rate or how many corrections happen before versus after the window closes. What is clear is that many retirees first learn about the penalty when a notice or bill arrives, often well after the optimal time to minimize the damage.
As the agency expands electronic communications, tools such as the online account portal could, in theory, deliver earlier warnings that an RMD appears to be missing. A message posted during the correction window, or even shortly after the end of the tax year, might give taxpayers enough time to arrange a catch-up withdrawal and limit the excise tax to 10%. By contrast, a notice generated only after enforcement systems detect the omission might not reach the taxpayer until the window is nearly closed or already shut.
For plan sponsors and employers, the IRS maintains a separate correction track through its Employee Plans Compliance Resolution System. Sponsors that discover RMD failures in their plans can file through the Voluntary Correction Program using Form 14568-H Schedule 8, according to IRS guidance on correcting RMD failures. That process addresses the plan-level compliance issue but does not automatically resolve the individual excise tax owed by the participant, who remains responsible for reporting and paying any penalty or seeking relief where available.
For individual retirees, the practical takeaway is that the RMD excise tax is no longer an all-or-nothing 25% hit. The statutory 10% alternative creates a meaningful incentive to fix mistakes quickly, and emerging IRS communication channels may eventually make it easier to spot those mistakes in time. Until then, however, the safest strategy is to track required distributions carefully, verify that custodians have executed instructions as intended, and, if a shortfall is discovered, move swiftly to complete the withdrawal and address the reporting before the correction window quietly closes.
