Required Minimum Distribution (RMD) Penalty Calculator

What is the current tax penalty rate for missing an RMD?

The current tax penalty rate for missing a Required Minimum Distribution (RMD) is 25% of the amount that should have been withdrawn but was not. However, if the taxpayer corrects the mistake in a timely manner, this penalty can be further reduced to 10%.

How did the SECURE 2.0 Act reduce the RMD penalty?

Before 2023, the penalty for failing to take an RMD was one of the steepest in the tax code at 50% of the missed amount. The SECURE 2.0 Act provided significant relief by cutting this standard excise tax in half, dropping the baseline penalty to 25%. It also established a new correction window framework that allows taxpayers to reduce the penalty even further down to 10% if they promptly fix the shortfall.

How do you qualify for the lowered ten percent penalty rate?

To reduce the penalty from 25% to 10%, you must correct the missed RMD during the IRS's designated "Correction Window." You must complete the following steps:

1. Withdraw the full missed RMD amount from your retirement account.
2. File an amended tax return (or standard return if not yet filed) paying the 10% penalty tax.
3. Complete these actions before the earliest of the following dates:
   • When the IRS issues a Notice of Deficiency for the penalty.
   • When the IRS actually assesses the penalty tax.
   • The last day of the second tax year following the year you missed the RMD.

Can the IRS completely waive the penalty for a missed RMD?

Yes, the IRS has the authority to completely waive the penalty tax for a missed RMD. To qualify for a waiver, you must demonstrate that the failure to take the distribution was due to a "reasonable error" and that you have already taken reasonable steps to remedy the shortfall (i.e., you have withdrawn the missed amount).

What qualifies as a reasonable error to get the penalty waived?

The IRS reviews waiver requests on a case-by-case basis. While they do not have a strict list, common situations that typically qualify as a "reasonable error" include:

• Severe illness or mental incapacitation of the account owner.
• A death or serious illness in the immediate family.
• A natural disaster that disrupted financial communications or records.
• An administrative or mathematical error made by the financial institution holding the account.
• Incorrect professional advice given by a certified tax preparer or financial advisor.

Which IRS form is required to report a missed RMD?

You must use IRS Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) to report a missed RMD. Specifically, you will use Part IX of the form to either calculate and pay the penalty tax owed or to formally request a penalty waiver from the IRS.

How do you properly correct a missed RMD from a prior year?

To properly fix a missed RMD from a previous year, follow these steps:

1. Withdraw the shortfall immediately: Take the missed RMD amount as a separate, distinct distribution. Do not lump it together with your current year's RMD.
2. File Form 5329: File this form for the specific tax year the RMD was missed.
3. Request a Waiver (if applicable): Write "RC" (Reasonable Cause) and the amount you want waived on the dotted line next to the total penalty line.
4. Attach a Letter: Include a brief letter explaining the reasonable error and stating that the missed amount has now been withdrawn.

When is the exact deadline to take an RMD to avoid penalties?

The exact deadline depends on whether it is your very first RMD or a subsequent year's RMD.

Do RMD penalties apply to inherited retirement accounts?

Yes, RMD penalties apply to inherited retirement accounts, such as inherited IRAs and 401(k)s. If a beneficiary is required to take annual distributions (depending on whether they fall under the 10-year rule or the life expectancy method) and fails to do so, they are subject to the same 25% penalty on the unwithdrawn amount. They can also utilize the correction window to reduce the penalty to 10% or file Form 5329 to request a waiver for reasonable cause.

What is the statute of limitations for the IRS to assess this penalty?

Under the SECURE 2.0 Act, the statute of limitations for the IRS to assess the missed RMD penalty is strictly capped at three years. Historically, if a taxpayer failed to file Form 5329, the statute of limitations never began. Now, the three-year clock starts exactly when the individual files their standard income tax return (Form 1040) for the year the RMD was missed, regardless of whether Form 5329 was included.

Sources:

• IRS: Retirement Topics - Required Minimum Distributions
• Investopedia: Missed Your RMD? Here is What to Do
• Fidelity: SECURE 2.0 Act Changes to Retirement

More in Retirement Planning Category