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Updated August 26, 2024 Reviewed by Reviewed by Marguerita ChengMarguerita is a Certified Financial Planner (CFP), Chartered Retirement Planning Counselor (CRPC), Retirement Income Certified Professional (RICP), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.
Fact checked by Fact checked by Vikki VelasquezVikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.
If you're at least 73 years old and own a traditional individual retirement account (IRA) or another type of non-Roth retirement account—such as a SEP IRA, a SIMPLE IRA, a 401(k), and/or a 403(b) account—you must take a required minimum distribution (RMD) each year. (Withdrawals from Roth IRAs are not required until after the death of the account owner, and as of 2024, RMDs are no longer required from designated Roth accounts in a 401(k) or 403(b) plan.)
If you fail to withdraw the RMD by the applicable deadline, there can be a penalty. For every dollar not withdrawn, the Internal Revenue Service (IRS) will charge a 25% penalty, known as an excise tax. However, if the failure is "timely corrected within two years," according to the IRS, the penalty is reduced from 25% to 10%. Here are the steps you should take if you're facing a possible RMD penalty.
If you feel that you missed the deadline due to a reasonable error, then you may ask the IRS to waive the 25% excise tax by filing IRS Form 5329 and attaching a letter of explanation for the waiver.
When requesting a waiver, do not pay the excise tax up front. Instead, follow the instructions for requesting a waiver in the Instructions for Form 5329. If the IRS does not honor your waiver request, you will be notified.
If you don't qualify for a waiver, you must pay the excise tax. The amount owed must be calculated and reported on IRS Form 5329 and IRS Form 1040 and filed with your federal tax return for the year in which the RMD shortfall occurred.
If you are not required to file your taxes with IRS Form 1040, you may file Form 5329 by itself and pay the excise tax owed. The IRS website offers instructions for Form 5329.
Complete the form with the requested information, and enclose your check or money order made payable to the United States Treasury. On the check or money order, write your Social Security number, the current tax year, and “Form 5329.” (Check the IRS website for other payment options.)
Beneficiaries must take RMDs, and IRS rules are based on the type of beneficiary. Beneficiaries are also subject to the 25% excise tax if they miss their RMD deadline.
But there is one instance where a beneficiary can get an automatic waiver of the excise tax. If you are a designated beneficiary who inherited a retirement account from an owner who died in 2019 or earlier, and their death occurred before their required beginning date (RBD), you are required to take annual beneficiary RMDs over your life expectancy, starting the year after the owner’s death. In some cases, you might be subject to the five-year rule instead. Under the five-year rule, you don't need to take distributions for the first four years, but you're required to withdraw the entire balance by the end of the fifth year. Check with your IRA custodian or your plan trustee to find out which rules apply to you.
Note: Under provisions of the SECURE Act of 2019, the five-year rule has been increased to 10 years for designated beneficiaries and eligible designated beneficiaries. Also, an eligible designated beneficiary may choose to take distributions over their life expectancy instead of the 10-year rule.
The SECURE 2.0 Act of 2022, part of the Consolidated Appropriations Act (CAA) of 2023, builds on the SECURE Act of 2019 and affects the RMD rules for retirement accounts.
While the excise penalty will generally apply if you did not withdraw the RMD amount on time, the penalty may be waived if you switch from the life expectancy rule to the five-year rule and withdraw the full balance of the account by Dec. 31 of the fifth year following the year when the retirement account owner died.
Let’s look at the following example:
In 2018, John, age 63, inherited an IRA from his husband Ron, who died at age 65. Since Ron died before his RBD, John has two options for distributing the IRA balance:
John chooses the life-expectancy option. The RMD for 2019 is $10,000, but John fails to withdraw any amount by December 31, 2019. If John wants to continue using the life-expectancy method, then he will have to pay the IRS an excise tax of $5,000 (the tax was 50% in the years before 2023) and must file Form 5329.
He may request a waiver if he feels the failure is due to a reasonable error. However, John will receive an automatic waiver of the penalty if he withdraws the account balance by December 31, 2024, the fifth RMD year following the year his husband died, plus an extra year's extension (because 2020 isn't counted due to the CARES Act).
The annual RMD is determined by dividing the retirement account’s prior year-end fair market value by a life expectancy factor published by the IRS.
Account holders can and often do take more than the RMD each year, commonly during retirement.
An IRA owner must calculate the RMD separately for each IRA but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract but can take the total amount from one or more of the 403(b) accounts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, have to be taken separately from each of those accounts. Additionally, RMDs for inherited accounts cannot be combined with RMDs for accounts you hold as owner.
Missing your RMD deadline can be frustrating as well as costly. To ensure it doesn't happen, take the necessary steps to make sure your distribution occurs by the applicable deadline. This includes making arrangements with your custodian for systematic or automatic withdrawals to occur on a predetermined date. Submit your withdrawal requests well before the deadline, and check your statements to ensure that the correct amount was distributed from your account.
