For decades, the penalty for missing a required minimum distribution was one of the harshest in the tax code. It's a lot smaller now. But it's still real money, and with December 31 a few weeks away, it's worth knowing exactly how it works.
This week we're walking through David's guide to RMDs. So far: why they exist, when they start and how much to take. Today: what happens if you miss one.
What's the penalty for a missed RMD?
- Before 2023: 50% of the shortfall.
- Today: 25% of the shortfall.
- Today, if corrected within the correction window: 10% of the shortfall.
The 50% excise tax dated to the original 1974 rules. SECURE 2.0 cut it to 25%, and to 10% when corrected in time, for tax years beginning in 2023.
How do you get the 10% rate?
Take the missed amount, and file a return that reports the tax. Generally you have until the end of the second year after the year of the miss, or sooner if the IRS has already sent a notice or assessed the tax.
Can the penalty be waived?
Yes. If the shortfall came from a reasonable error and you are fixing it, you can ask the IRS to waive the penalty entirely. The request goes on Form 5329, with a short explanation.
It isn't automatic. But it is often granted when the mistake is caught and corrected promptly.
Why does December matter?
Every RMD after your first is due by December 31. Catching a missed or short RMD early is the cheapest fix there is, which is why David recommends a review before December, not after the notice arrives.
A few minutes now can answer the questions that cause most misses:
- Did you take this year's RMD from every 401(k), since each one must pay its own?
- If you combined your IRA RMDs, did the total cover all of them?
- Is this your first RMD year, and if so, are you taking it by December 31 or waiting until April 1?
- Did an inherited IRA come with yearly withdrawals of its own?
Tomorrow: the RMD's biggest ripple, and why it can show up on your Medicare bill two years later.
The full penalty rules are in David's guide, The Hidden History of the Rule That Taxes Your Retirement. If you'd like a year-end look at your RMDs alongside your tax professional, you can begin the conversation here.
This is Part 4 of The Rule That Taxes Your Retirement, a seven-part series from David Schaeffer's guide. For education only. Not tax, legal or investment advice.
Disclaimer: The information in this article is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws change frequently, and individual circumstances vary. American Retirement Advisors does not provide tax or legal services. Before making any tax-related decisions, consult a qualified CPA, tax attorney, or financial planner who can evaluate your specific situation.