What Happens If You Miss an RMD: The 25% Penalty and How to Fix It

The penalty for a missed required minimum distribution (RMD) is 25% of the amount you failed to withdraw, down from 50% before the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act took effect January 1, 2023. It drops to 10% if you correct the miss within a two-year window, and the IRS often waives it entirely when you take the late distribution and file Form 5329 with a reasonable-cause explanation.

The Penalty and the Correction Window

Under the old rules, a $20,000 missed RMD meant a $10,000 excise tax on top of the ordinary income tax due on the distribution. SECURE 2.0 cut the baseline to 25% of the shortfall, and to 10% inside the "correction window," which generally ends on the last day of the second year after the year the RMD was missed (sooner if the IRS mails a deficiency notice or assesses the tax first). Miss your 2024 RMD and the low-penalty window generally closes on December 31, 2026.

How the Fix Works: Form 5329 and Reasonable Cause

Take the missed distribution first; the money must come out before you request a waiver. Then file (or amend) Form 5329, Part IX, with your return for the year the RMD was missed, even if you discovered the error later. Part IX is where you report the shortfall and request the waiver: follow the current Form 5329 instructions for where to enter "RC" (reasonable cause) and the amount to be waived, and attach a written explanation. If the IRS agrees, you owe nothing beyond income tax on the distribution; if not, the 25% (or 10%) plus interest.

The IRS usually accepts administrative oversight (a custodian calculating the wrong amount or failing to notify, a newly inherited account, a first year at 73), serious illness or a family emergency, or documented good-faith reliance on incorrect professional advice. Forgetting, or assuming your custodian would handle it automatically, usually does not qualify.

The wording of the waiver statement matters. A specific single-page letter can go through cleanly, while a vague note can trigger months of follow-up correspondence. Specificity, documentation, and a clear timeline do the work.

When This Applies vs. When It Does Not

The correction process applies to traditional individual retirement accounts (IRAs), simplified employee pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, most employer plans including 401(k)s and 403(b)s, and inherited IRAs when annual distributions are required under the 10-year rule. It does not apply to Roth IRAs owned by the original account holder, which have no lifetime RMD.

One avoidable trap: the "still working" exception can defer RMDs from your current employer's plan past 73 (it is unavailable to 5% owners), but it never extends to IRAs or prior employers' plans. Missing a rollover-IRA distribution on that belief is a common error.

How This Connects to RMDs and QCDs

A missed RMD is usually a symptom of a plan without a systematic distribution process. How RMDs are calculated, what SECURE 2.0 changed for inherited accounts, and how qualified charitable distributions (QCDs) can offset the tax impact are all covered in the parent pillar: RMDs and QCDs: The Required-Distribution Rules That Shape Retirement Income After 73.

Frequently Asked Questions

Does the IRS automatically grant the waiver if I file Form 5329?

Approval is not automatic, though the IRS has a strong track record of approving first-time failures accompanied by a clear reasonable-cause explanation and proof the distribution was taken. Approval is never certain.

Can I miss an RMD in multiple years and fix them all at once?

You can correct multiple years, but you must file a separate Form 5329 for each affected tax year. If those years require amended returns, plan for extra processing time.

What if my IRA custodian made the calculation error?

Custodian error is one of the cleaner reasonable-cause arguments. Document the error in writing, obtain a corrected calculation, and attach that correspondence to your waiver request.

Will a missed RMD trigger an IRS audit?

Not necessarily, but custodians report year-end IRA balances on Form 5498, and a large balance with no corresponding distribution can attract a letter inquiry. Filing Form 5329 proactively beats waiting for the IRS to find you.

What to Do Next

Speed matters. Correcting within two years reduces the penalty from 25% to 10%, and a waiver request with reasonable cause is often granted.

Common mistakes. Two opposite reactions, both costly. Some people hope it goes unnoticed, which converts a correctable oversight into a compounding one, since each missed year stacks. Others pay the penalty immediately without filing for the waiver, treating it as a fixed fine when the IRS often forgives it once the shortfall is made up and the cause is honest. Illness, a death in the family, a custodian error and a first year of confusion about the rules are all the sort of thing that gets accepted, but the waiver has to be requested.

Worth a conversation if you have missed a distribution, you are managing accounts for a parent whose paperwork you inherited mid-stream, or you are unsure whether prior years were satisfied. The correction is procedural and the outcome usually good, but the wording of the request matters. Book a call.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Tax law changes frequently, so verify current rules before acting. Consult with qualified professionals for guidance specific to your situation.