RMDs · 8 min read
The Missed RMD Penalty: What It Costs and How to Correct It
A missed required minimum distribution carries a 25 percent excise tax on the shortfall, the portion that should have come out but did not. Withdrawing the missed amount within the correction window lowers the rate to 10 percent, and the IRS may waive the tax entirely for reasonable error. Form 5329 is where both are reported.
A missed required minimum distribution is rarely a question of discipline. In our experience it is a question of structure: too many accounts, a death in the family, a first year with an unfamiliar deadline, or a withdrawal request that settled a few days late. The tax code treats the result the same way regardless of cause, so the useful questions are what the shortfall costs, how quickly it can be repaired, and what keeps it from happening twice.
The specifics of any correction should be confirmed with a tax professional.
Where Missed RMDs Usually Come From
The mechanics of an RMD are simple on paper: a prior year-end balance divided by an IRS life-expectancy factor, withdrawn by December 31. (IRS Publication 590-B) The failures tend to cluster in a handful of situations where that simple rule meets a complicated household.
- Accounts scattered across custodians. Several IRAs can be totaled and the combined requirement taken from any of them. Workplace plans sit outside that arrangement: every 401(k) or 403(b) carries its own RMD, payable only from that plan. A forgotten employer plan is a frequent source of shortfalls.
- The first year. The first RMD may be postponed until April 1 of the year after the owner reaches the starting age (73 for those born 1951 through 1959; 75 for those born 1960 or later). The second RMD is still due December 31 of that same year. The April withdrawal does not cover both.
- Inherited IRAs. A beneficiary under the 10-year rule, inheriting from an owner who had already begun RMDs, generally owes annual distributions in years one through nine as well as emptying the account by year ten. The IRS excused missed annual payments during the transition and required them starting with distributions due in 2025. (IRS Notice 2024-35)
- A death during the distribution year. An owner who dies before taking that year's RMD does not cancel it. The obligation passes to the beneficiary, who may not learn of it for months.
- Settlement timing. A distribution counts in the year it leaves the account. A request submitted in late December that processes in January belongs to the next year.
The Penalty Math, Worked Through
The excise tax is computed on the shortfall alone: the amount required minus the amount distributed. It is 25 percent of that figure, and it falls to 10 percent when the shortfall is corrected within the statutory correction window. (26 U.S.C. §4974) The rest of the account balance plays no part in the calculation.
Consider a hypothetical owner who turns 77 in 2026 with two accounts:
- An IRA worth $458,000 on December 31, 2025. The Uniform Lifetime Table factor at 77 is 22.9, so the 2026 RMD is $458,000 ÷ 22.9 = $20,000. The owner withdrew $12,000 during the year.
- A former employer’s 401(k) worth $137,400 on the same date. The RMD is $137,400 ÷ 22.9 = $6,000. Nothing was withdrawn, because the owner assumed the IRA withdrawals covered it.
| Account | Required | Taken | Shortfall | Tax at 25% | Tax at 10% (corrected in window) |
|---|---|---|---|---|---|
| IRA | $20,000 | $12,000 | $8,000 | $2,000 | $800 |
| 401(k) | $6,000 | $0 | $6,000 | $1,500 | $600 |
| Total | $26,000 | $12,000 | $14,000 | $3,500 | $1,400 |
Acting inside the window is worth $2,100 here. The excise tax also sits on top of the income tax owed when the $14,000 finally comes out. And had the 401(k) balance been held in an IRA, the aggregation rule would have let one withdrawal cover both requirements.
25 percent versus 10 percent of the shortfall. For this household, $3,500 or $1,400 — a $2,100 difference decided almost entirely by how quickly the missed amount comes out.
A Correction Sequence, Step by Step
Once a shortfall surfaces, the order of operations matters. The sequence a household and its tax preparer would typically follow:
- Quantify the shortfall by account. Compare each account’s requirement against what actually came out. IRAs can be compared in total; each workplace plan stands alone.
- Withdraw the missed amount from the right account. A 401(k) shortfall must come from that 401(k). The catch-up distribution does not reduce the current year’s requirement, which still has to be taken in full by December 31.
- Decide between paying the reduced tax and requesting a waiver. A genuine error supports a waiver request; otherwise, prompt correction earns the 10 percent rate.
- File Form 5329 for the year of the shortfall. Use that year’s version of the form. (Instructions for Form 5329)
The correction window runs from the date the tax is imposed until the earliest of three events: the IRS mails a notice of deficiency, the IRS assesses the tax, or the last day of the second tax year beginning after the year of the shortfall. (§4974(e)) For a 2026 shortfall, that outer date is December 31, 2028 — but only if the IRS has not acted first. Waiting for the outer date is a wager, not a plan.
SECURE 2.0 also changed how long the IRS has to pursue an IRA shortfall. For the excise tax on an IRA, the owner’s income tax return for the year of the miss now counts as the return that starts the three-year assessment period, even when no Form 5329 was filed. (26 U.S.C. §6501(l)(4)) Before that change, an unfiled Form 5329 could leave the exposure open indefinitely.
Requesting a Waiver: What the Request Needs to Show
The IRS may waive the tax in full, and the statute sets out exactly two conditions: the shortfall resulted from reasonable error, and reasonable steps are being taken to remedy it. (§4974(d)) A request is strongest when it answers both directly.
- The error, in plain terms. A custodian that failed to process an instruction, a serious illness, or a beneficiary unaware of an inherited requirement are the kinds of facts that speak to reasonable error.
- The remedy, with dates. When the shortfall was found and when the missed amount came out. The request presumes the distribution has been made.
- The form mechanics. The Form 5329 instructions direct filers to enter “RC” and the amount to be waived on the dotted line next to the excess-accumulation line and attach the explanation. Any remaining tax is still due. (Instructions for Form 5329)
One situation is handled without a request. When an owner dies before taking the year’s RMD, Treasury regulations waive the tax automatically if the beneficiary takes the distribution by the beneficiary’s tax filing deadline, including extensions, for the year of death, or by the end of the following calendar year if that is later. (26 CFR §54.4974-1(g))
A waiver is discretionary. The 10 percent rate is the outcome a household controls by correcting promptly; the full waiver is an outcome the IRS grants or declines.
How We Build RMDs Into a Plan So They Cannot Be Missed
We treat the RMD as a scheduled cash-flow event inside the plan, not a year-end chore. The coordination has four parts.
- An account inventory. Every account subject to RMDs, including inherited IRAs and dormant employer plans, is listed with its balance and governing rule. Fewer accounts means fewer separate requirements.
- Charitable giving routed through the IRA. For households already giving, a qualified charitable distribution can count toward the RMD while keeping the gift out of taxable income. Sequencing matters, because a withdrawal already paid to the owner cannot later be recharacterized as a gift.
- Withholding set deliberately. Federal withholding can come from the distribution itself. We set the amount and timing with the tax preparer rather than accepting a default.
- The first-year decision made on paper. Postponing the first RMD to April 1 stacks two distributions into one tax year. We model both paths against each year’s brackets; the mechanics are in our guide to the first RMD’s two deadlines.
For inherited accounts, the annual-distribution requirement and the ten-year deadline are both calendared from the date of death; the 10-year rule explains how they interact. The full framework for calculating and scheduling distributions is in our RMD guide.
What This Does Not Mean
- It does not mean a miss is inexpensive. The catch-up amount is ordinary income, often landing alongside that year’s regular RMD. Two years of distributions on one return can raise the bracket, the taxable share of Social Security, and Medicare IRMAA premiums two years later.
- It does not mean the window can be counted on. An IRS notice ends it early.
- It does not mean a waiver is routine. The IRS decides each request on its facts.
- It is not personalized advice. Waiver and reporting decisions belong with a tax professional who can see the full return.
Frequently Asked Questions
Q: What does the missed RMD penalty cost?
25 percent of the shortfall: a $20,000 shortfall carries a $5,000 tax. Withdrawn within the correction window, the rate falls to 10 percent, or $2,000.
Q: When does the correction window close?
At the earliest of an IRS deficiency notice, an IRS assessment, or the last day of the second tax year after the shortfall year. For a 2026 shortfall, the outside date is December 31, 2028.
Q: Does the missed amount still count as taxable income?
Yes. The excise tax is added to the ordinary income tax on the distribution, which is taxed in the year it is actually taken.
Q: Is there an automatic waiver when the account owner dies during the year?
Yes, if the beneficiary takes the owner's unpaid RMD by the beneficiary's filing deadline, with extensions, for the year of death, or by the end of the following year if later.
Q: How is a waiver requested on Form 5329?
Write “RC” and the amount to be waived beside the excess-accumulation line, and attach an explanation showing reasonable error and the steps taken to fix it. The IRS decides at its discretion.
Q: Can an IRA withdrawal cover a missed 401(k) RMD?
No. IRAs can be combined for IRA RMDs, but each workplace plan's RMD must come from that plan.
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The views and opinions expressed here are those of The Financial Sciences Company as of the publish date and are provided for informational and educational purposes only. They are not personalized investment, tax, or legal advice. The Financial Sciences Company, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Additional information is available in our Form ADV at adviserinfo.sec.gov.
General educational information, current as of 2026. Figures and rules change. For guidance specific to your situation, speak with a qualified professional.