Missing an RMD Could Leave Retirees Owing a 25% Penalty

Millions of Americans have spent years building tax-deferred retirement savings, but a year-end deadline can put part of that money at risk. The rule applies to retirees who must take withdrawals from certain accounts once they reach a specific age.

The Internal Revenue Service (IRS) levies a 25% excise tax on required minimum distributions, or RMDs, that account holders age 73 or older fail to withdraw on time. For most retirees, the deadline falls on Dec. 31.

Although the SECURE 2.0 Act of 2022 cut the penalty from 50% to 25%, the remaining tax can still take a meaningful bite out of retirement savings. It is also owed on top of the regular income tax due on the withdrawal.

As the deadline nears, Ed Slott & Co. has repeatedly pointed to missed RMDs as an expensive but avoidable tax error.

Under IRS Publication 590-B, the account owner is still responsible for taking the correct distribution even if a financial institution manages the account.

The 25% excise tax covers any amount short of the required distribution

The penalty applies to the difference between what a retiree withdraws and what the IRS says is required, based on the prior year’s account balance. Any shortfall can trigger the tax, whether the owner simply forgot or withdrew less than required for the year, according to the IRS.

People who turn 73 must take their first withdrawal by April 1 of the following year, and each later distribution is due by Dec. 31. That first-year rule can surprise retirees because it may require two taxable distributions in the same calendar year.

The IRS uses life expectancy tables in Publication 590-B to determine the annual amount by dividing the prior-year balance by the relevant factor.

Different tables apply depending on whether the account holder has a sole-beneficiary spouse who is more than 10 years younger.

Plan custodians usually calculate the amount, but the account owner remains legally responsible for taking the correct distribution, according to the IRS Retirement Plan and IRA Required Minimum Distributions FAQs.

This split between calculation and legal responsibility often leads to year-end mistakes, as described in IRS Publication 590-B.

SECURE 2.0 changed the retirement withdrawal rules

Before SECURE 2.0 took effect in 2023, the IRS imposed a 50% excise tax on missed withdrawals, one of the steepest penalties in federal law. That former rate had been in place for decades and could wipe out much of a smaller account balance in a single year.

The law also raised the starting age from 72 to 73 and cut the penalty in half, giving retirees more room for honest mistakes. Congress approved the measure in late 2022 as part of a broader federal spending package.

The reform also created a correction period that lowers the rate to 10% if the account owner fixes the shortfall within two calendar years, the IRS has confirmed. That tiered structure gives retirees a second chance that did not exist before the law took effect in 2023.

The changes also ended required withdrawals from Designated Roth accounts inside 401(k) and 403(b) plans while the owner is alive.

That brought employer-sponsored Roth balances in line with the longstanding treatment of individual Roth retirement accounts held outside the workplace.

Experts say year-end planning should go beyond the minimum

The Dec. 31 deadline is often treated as a one-time compliance task, but that can obscure the wider tax effects of the withdrawal. Retirement specialists at Ed Slott & Co. have long argued that the required amount should be viewed as a starting point, not the full year-end strategy.

Ed Slott, a certified public accountant and founder and CEO of Ed Slott and Company, has long advised savers in lower-income retirement years to consider taking more than the minimum, Investment News reported.

He tells clients that the deadline can be used to take advantage of remaining room in a lower tax bracket before income rises later in retirement.

Slott shared his year-end guidance for advisors and their clients in an email to ThinkAdvisor in November 2025.

Make sure all year-end RMDs are taken, but also look to increase them if any part of a low tax bracket is not maximized,

That view reflects Slott’s broader point that taxable retirement income can be spread across several years instead of being concentrated later.

In the Slott Report, Ed Slott & Co. has also recommended taking withdrawals earlier in the year as a cushion, leaving extra time for custodian processing before the hard deadline.

What savers age 73 and older should verify before Dec. 31

Sarah Brenner, director of retirement education at Ed Slott and Company, has advised owners nearing the deadline to ask each custodian for the current-year amount directly.

Owners with multiple IRAs may satisfy the obligation from one account, though IRS guidance says 401(k) and 457(b) plans must be handled separately.

Anyone who misses the deadline must withdraw the shortfall and file Form 5329 with the tax return for the following year, according to IRS rules.

Retirees who want to keep the withdrawal out of taxable income can send it to charity through a qualified charitable distribution, which the IRS says is available to owners age 70½ and older.

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