Miss a Required Retirement Withdrawal and the Tax Can Reach 25%

Retirement-account owners who are required to take a minimum distribution can face a 25% excise tax on the amount they failed to withdraw. For many people already in the annual RMD cycle, the deadline for the year’s required distribution is December 31.

The Tax Applies to the Amount That Was Missed

The IRS says an account owner who fails to withdraw the full required minimum distribution by the due date may owe an excise tax equal to 25% of the shortfall. The tax is calculated on the amount that should have been distributed but was not.

That makes a missed deadline materially different from a late piece of paperwork. A distribution shortfall can create a separate federal tax obligation that must be reported.

Correcting the Mistake Can Reduce the Rate

The IRS also provides a lower 10% rate when the missed RMD is corrected within the required correction window, generally within two years. In some cases, the IRS can waive the penalty when the shortfall resulted from reasonable error and the taxpayer is taking reasonable steps to fix it.

Taxpayers may need to file Form 5329 to report the excise tax or request relief, depending on the circumstances.

December 31 Is the Recurring Deadline for Many Account Owners

The first RMD can have a different timing rule for someone newly reaching the required age, but after that first-year exception, annual required minimum distributions are generally due by December 31.

That leaves a straightforward year-end check for anyone subject to the rule: confirm whether the full required amount has actually left the retirement account before the deadline. The IRS rules make the potential cost of missing that step unusually concrete - up to 25% of the amount left undistributed.

References: Retirement topics - Required minimum distributions (RMDs) | Retirement plan and IRA required minimum distributions FAQs