Missed RMD Penalty: The 25% Excise Tax and the 10% Correction Rate

A missed RMD is one of the most common tax mistakes retirees make, and one of the most forgivable. People forget an old IRA at a small bank. A custodian changes hands. A spouse who handled the finances dies. An inherited account comes with rules nobody explained.

The law imposes a stiff excise tax for the shortfall. It also builds in two ways to shrink it, and one way to eliminate it. The order you do things in matters.

The tax in section 4974

IRC 4974(a) imposes a tax equal to 25 percent of the amount by which your minimum required distribution for the year exceeds what you actually took. The person who was supposed to receive the distribution, the payee, pays it. Before the SECURE 2.0 Act, the rate was 50 percent. The 25 percent rate applies to taxable years beginning after December 29, 2022.

The tax applies to shortfalls from IRAs, 401(a) plans such as 401(k)s, 403(a) and 403(b) arrangements, and governmental 457(b) plans. The minimum required distribution is whatever section 401(a)(9) and the related provisions require for that year, computed under the regulations.

Because it is an excise tax, not a penalty, first-time abatement does not apply. The waiver process in 4974(d) is the relief route.

The 10 percent correction rate

Section 4974(e) cuts the rate to 10 percent if, during the correction window, you take the missed amount from the same plan and file a return reflecting the tax. The correction window starts when the tax is imposed and ends on the earliest of:

1. The date the IRS mails a notice of deficiency for the 4974 tax.
2. The date the tax is assessed.
3. The last day of the second taxable year beginning after the year the tax was imposed.

In practical terms, if you discover a 2025 shortfall in 2026, you generally have until the end of 2027 to take the distribution and file, as long as the IRS has not already assessed the tax or sent a deficiency notice. Waiting for the IRS to find it can close the window.

Waiver: often the best answer

Under section 4974(d), the IRS may waive the tax entirely if you show that the shortfall was due to reasonable error and that you are taking reasonable steps to remedy it. Reasonable error covers a lot of real life: illness, a death in the family, custodian mistakes, bad advice, confusion over the new ages or the inherited IRA rules. The procedure is covered in how to request an RMD penalty waiver on Form 5329.

The steps are the same whether you end up paying 10 percent or nothing: take the missed distribution, then file Form 5329.

How to fix a missed RMD

1. Figure the shortfall. For each account and year, compute the RMD using the prior December 31 balance and the correct life expectancy factor. For IRAs, you compute each IRA's RMD separately but may take the total from any one or more of your IRAs. For 401(k)s and 457(b)s, each plan's RMD must come from that plan.
2. Take the missed amount now. This is a catch-up distribution. It is taxable in the year you take it. It does not count toward the current year's RMD, so take both.
3. File Form 5329 for each year with a shortfall, either with your Form 1040 or as a standalone form for prior years. Report the required amount, the amount distributed, and the shortfall.
4. Either compute the tax at the correct rate or request a waiver, with a short written explanation.

How the IRS finds missed RMDs

IRA custodians file Form 5498 each year, and the form tells the IRS when an RMD is required for the following year. The custodian also reports distributions on Form 1099-R. If a 5498 says an RMD was due and no matching distribution appears, the IRS has what it needs to ask questions. Employer plans report differently, but distributions still appear on Form 1099-R.

The statute of limitations problem

For years, retirees who never filed Form 5329 faced an open-ended exposure, because the limitations period for the excise tax was tied to filing that form. SECURE 2.0 amended IRC 6501(l)(4) so that, for the 4974 tax connected to an individual retirement plan, the income tax return you file for the year of the shortfall counts as the return that starts the limitations period. If you were not required to file an income tax return, the period starts on the date the return would have been due. Filing Form 5329 is still the right move, both to claim the 10 percent rate or the waiver and to put the issue on the record.

A worked example

Say a 76-year-old in Treasure Island forgot an IRA at a credit union with a $60,000 balance at the end of 2024. Her 2025 RMD from that account, using the Uniform Lifetime Table factor for her age, was a little over $2,500. She discovers it in spring 2026.

• At 25 percent, the excise tax would be over $600.
• If she takes the missed amount and files Form 5329 within the correction window, it drops to 10 percent, about $250.
• If she takes the distribution and shows reasonable error, the IRS can waive it entirely.

The figures are illustrative and rounded. The point is the sequence. Take the distribution first, then file.

When several years were missed

Forgotten accounts often go unnoticed for years. Each year with a shortfall is a separate 4974 tax, and each one needs its own Form 5329. The catch-up is the sum of each missed year's RMD, computed with that year's prior December 31 balance and factor. Take the full catch-up as soon as you can, because taking it starts to satisfy the "reasonable steps" part of the waiver test for every year at once. Then file the 5329s together with one explanation that covers the whole period. A multi-year miss caused by a single forgotten account usually tells a coherent story, and the IRS evaluates it that way.

Inherited accounts

Beneficiaries face the same excise tax for missed RMDs from inherited accounts, and the inherited IRA rules have changed several times since 2020. The IRS waived the tax for certain missed annual RMDs under the 10-year rule for 2021 through 2024, but required distributions under the final regulations apply starting in 2025. See the inherited IRA 10-year rule.

Missed RMD plus other IRS trouble

If you also owe the IRS for other years, do not skip RMDs to avoid creating income. Skipping one adds the 4974 tax to the pile. Take the distribution, have enough withheld to cover the tax on it, and keep the new year clean. A clean current year is what makes payment plans and hardship arrangements stick. If the catch-up distribution creates a balance you cannot pay, see installment agreements in Pinellas County.

Check your RMD age before you assume you were late. The ages changed twice in a few years. See RMD ages 73 and 75.

Next step

Take the missed distribution now, then file Form 5329 with a waiver request. If the IRS has already sent a notice proposing the tax, respond by the deadline with the distribution proof and your explanation. If you want help, call (813) 229-7100. The firm's page on penalty abatement covers related relief for other penalties on the same return.