Heirs who inherited retirement accounts under the 10-year distribution rule and skipped annual withdrawals during a two-year IRS grace period now owe a 25% excise tax on every dollar they failed to take out. The IRS had announced it would not penalize certain beneficiaries who missed required minimum distributions in 2021 and 2022, but that relief has ended. Anyone who continues to skip withdrawals faces the full penalty, though a narrow correction window can cut the tax rate to 10% for those who act quickly enough.
Why the end of IRS relief changes the math for inherited IRA holders
The 2019 SECURE Act replaced the old “stretch IRA” option with a 10-year depletion requirement for most non-spouse beneficiaries. That change created immediate confusion about whether heirs also had to take annual distributions during the 10-year window or could simply empty the account by the deadline. The IRS responded by stating it would not treat certain beneficiaries subject to the 10-year rule who failed to take RMDs in 2021 and 2022 as having failed to take the correct RMD. That two-year pause gave heirs breathing room while the agency finalized its regulations.
The breathing room is gone. Under section 54.4974-1, the excise tax on missed accumulations in qualified retirement plans stands at 25%. Beneficiaries who missed a distribution and then correct the shortfall within the defined correction window can reduce that rate to 10%, but the clock on that window is tight. Heirs who took no action during the non-enforcement years and continued skipping withdrawals afterward now face a stacking problem: the penalty applies to each year’s missed amount separately.
For many families, this changes the basic planning math around inherited IRAs. Instead of allowing the account to grow tax-deferred for most of the 10-year period, beneficiaries now have to balance investment growth against the risk of compounding penalties. The excise tax is in addition to ordinary income tax owed on the distributions themselves, so failing to act can quickly erase much of the inherited value. Beneficiaries who assumed the grace period meant they could wait until year 10 to empty the account must now reassess their strategy and, in many cases, unwind several years of inaction.
Final RMD regulations, Form 5329, and the correction timeline
The Government Accountability Office classified the final RMD regulation, tracked under RIN 1545-BP82, as a major rule. That designation confirmed the regulation’s broad economic impact and locked in the distribution framework that beneficiaries must now follow. With the rulemaking complete, the IRS has no pending reason to extend further relief. The practical message for heirs is that the temporary flexibility is over; the 10-year rule and related annual distribution requirements are now fully operational.
Beneficiaries who need to request a waiver or reduction of the excise tax must file Form 5329, according to the IRS RMD frequently asked questions. The form requires an explanation of the shortfall and evidence that the taxpayer has taken corrective action, typically by withdrawing the missed amount as soon as the error is discovered. The two-year correction window that reduces the penalty from 25% to 10% creates a specific, time-bound incentive to file promptly. Beneficiaries who waited through 2021 and 2022 without taking distributions, then also skipped 2023, face overlapping correction deadlines that compress the available response time.
IRS Publication 590-B provides the computation tables and beneficiary distribution rules that determine each year’s required withdrawal amount. The calculation depends on factors such as the original account owner’s age at death, whether they had already begun RMDs, and the type of beneficiary. Getting those inputs wrong can lead to under-distributions that quietly trigger excise tax exposure. Because the penalty is calculated on the shortfall, even partial mistakes-such as withdrawing something but not enough-can still generate a liability that must be addressed through Form 5329.
Practical steps for heirs facing missed distributions
The first priority for any beneficiary who may have missed RMDs is to reconstruct the account’s history. That means confirming the date of death, identifying which version of the rules applies, and comparing actual withdrawals to what should have been taken each year. Account custodians can usually provide prior-year December 31 balances and distribution records, but they do not calculate or pay the excise tax for you. Beneficiaries should be prepared to work with a tax professional to determine the precise shortfall amounts and the years involved.
Once the missed distributions are known, the next step is to take corrective withdrawals as soon as possible. Acting quickly not only stops additional years from going off track but also helps keep the case within the two-year window where the excise tax can be reduced to 10%. Filing Form 5329 with a clear explanation, documentation of the corrective distributions, and a request for relief is essential. While the regulations set the default penalty, the IRS has discretion to waive some or all of it when the taxpayer shows reasonable cause and timely correction.
Because the stakes can be high, some beneficiaries may want to monitor their case status directly with the IRS. Tools such as the agency’s online account and the separate business account portal can help taxpayers and their advisors track notices, payments, and adjustments once a return and Form 5329 have been filed. Keeping careful records of all correspondence and withdrawals can strengthen a request for penalty relief and reduce the risk of future disputes.
The end of the grace period around inherited IRA RMDs marks a turning point for heirs who hoped to delay decisions. With the final regulations in place and the 25% excise tax now fully enforceable, beneficiaries must treat missed distributions as urgent problems, not distant technicalities. Reviewing inherited accounts, catching up on withdrawals, and proactively addressing any shortfalls through Form 5329 can prevent a temporary oversight from becoming a permanent drain on family wealth.
