What is the penalty for not taking RMDs?

Understand what RMDs are and know when you need to take them.  

Required Minimum Distributions (RMDs) represent the minimum amount individuals must withdraw annually from their retirement accounts once they reach a specific age, generally 73. Applicable to a range of retirement accounts, including Individual Retirement Accounts (IRAs), SIMPLE IRAs, SEP IRAs, and 401(k)s, RMDs ensure that account holders commence withdrawals and fulfill tax obligations. Notably, Roth IRAs deviate from this requirement, as they don’t mandate withdrawals until after the account owner’s death. The calculation of RMDs considers factors making it a crucial aspect of financial planning for those approaching retirement. Failure to adhere to the RMD rules can result in substantial penalties.

Required Minimum Distributions Yearly Changes

Are you aware of the changes to required minimum distribution (RMD) rules for retirement accounts, including employer-sponsored retirement plans like 401(k)s, traditional IRAs, SEP IRAs, and inherited (but not owned) Roth IRAs in 2025?

These rules have undergone several changes in recent years, starting with 2019’s SECURE Act, so it’s understandable if you’ve had trouble keeping up.

Here’s a look at the critical changes to required minimum distribution rules that went into effect on January 1, what you can do to ensure you take your full distribution, and how to correct a mistake:

2025 Changes to Required Minimum Distribution

Roth Plans

Starting in 2023, the SECURE 2.0 Act increased the age at which you must begin taking Required Minimum Distributions (RMDs) to 73. If you turn 72 in 2023, your first RMD will be due by April 1, 2025, covering the 2024 tax year. Additionally, IRS Notice 2023-23 allows financial institutions to inform IRA holders by April 28, 2023, that no RMD is required for 2023.

RMD for IRA

The first required minimum distribution (RMD) must be taken for the year in which an individual reaches age 72 (or age 73 if age 72 is reached after December 31, 2022). However, the first RMD can be deferred until April 1 of the following year. For individuals reaching age 72 in 2022, the first RMD must be taken by April 1, 2023, with the second RMD due by December 31, 2023.

For those reaching age 72 in 2023, the first RMD, covering the 2024 tax year (when they turn 73), must be taken by April 1, 2025.

A separate deadline may apply for RMDs from pre-1987 contributions to a 403(b) plan.

2025 Changes to 401(k) Employee Deferral

Contribution Limits

In November, the IRS announced higher 401(k) contribution limits for 2025, raising employee deferrals to $23,500, an increase from $23,000 in 2024.

Defined Contribution

According to the IRS, the “defined contribution” limit for 401(k) plans in 2025, which includes employee deferrals, company matches, profit-sharing, and other contributions, will rise to $70,000, up from $69,000 in 2024.

Recent Changes to Required Minimum Distribution Rules

Starting age has increased again.

The SECURE Act increased the RMD age from 70 ½ to 72 starting in 2020, but in 2022, the SECURE ACT 2.0 became law, bringing additional changes.

In 2023, you only have to start taking the required minimum distributions if you turn 73 instead of 72. Deadlines have not changed, however — if you’re turning 73 this year, you must take your RMD by April 1. If you’re already taking the required minimum distributions, your deadline remains December 31.

The penalty for not taking an RMD is lower.

Previously, the penalty for not taking your required minimum distribution was a stiff 50% of the difference between the amount you took and the amount you were supposed to take. For example, if your RMD in 2022 was $15,000, and you only took $10,000, you would have had to pay a $2,500 penalty (50% of the $5,000 difference).

In 2023, that penalty drops to 25% — and it drops further to a mere 10% if you take the amount you were supposed to take within two years. Under the new rules, the potential penalty in the above example drops to a maximum of $1,250 and a mere $500 if corrected quickly.

Special RMD Considerations for Inherited Retirement Accounts

The SECURE Act changed how inherited IRAs are treated and made things somewhat confusing by creating separate rules for IRAs inherited before 2020 and those inherited after 2020.

There are also separate rules for spousal beneficiaries versus non-spousal beneficiaries. The main difference is that spousal beneficiaries can use only their life expectancy to calculate RMD amounts. Non-spousal beneficiaries have to calculate based on the length of their life expectancy or the account owner’s remaining life expectancy.

RMD rules for accounts inherited before 2020:

Given the time that passed, if you inherited a retirement account before 2020, you likely have already included it in your required minimum distribution calculations, especially if the original account holder was required to take RMDs. However, if you opted to follow the five-year rule — that is, you will empty the account by the 5th year after the account holder’s death — make sure to draw down any account inherited from someone who died in 2017 (2020 does not count for calculating the five years)

RMD rules for accounts inherited after 2020:

The significant difference for accounts inherited after 2020 is that the five-year rule becomes the 10-year rule.

Non-spousal beneficiaries are divided into “eligible designated beneficiary” and “designated beneficiary.” Eligible designated beneficiaries include minor children, disabled or chronically ill individuals, and individuals over ten years younger than the original account owner. They can follow the 10-year rule or take RMDs based on the life expectancy calculation; other individual beneficiaries are limited to following the 10-year rule. Non-individual beneficiaries such as trusts have to follow pre-2020 rules).

How to Calculate Your RMD

The IRS provides several worksheets to calculate required minimum distributions. If you have multiple retirement accounts, it’s best to work with a tax professional or financial advisor to make this calculation.

How to Correct an RMD Mistake

Take the required distribution amount.

If you discover that you didn’t take out enough money, request the amount you need to take immediately. You must withdraw enough from your retirement accounts to meet the annual minimum distribution requirement.

Ask your plan custodian to issue a check rather than an electronic fund transfer. This makes it easier to document that corrective action was taken. Make a copy of the check to submit to the IRS.

Write a letter to the IRS.

Once you’ve taken the distribution, write a letter to the IRS providing a “reasonable cause” for the error. Your letter should be short and direct. Describe what happened (and why). Also, note that the RMD has since been fulfilled and that you are taking steps to avoid making the same error in future years.

The IRS is aware of how complex RMD rules are and is more likely than not to grant your request if you can show that you have made a good-faith effort to correct the error as soon as possible.

Sometimes, the IRS is more likely to waive the penalty than others. Yes. You will likely receive forgiveness if your financial institution causes the error. IN MOST CASES, the IRS will also excuse you because of a severe illness or mental incapacitation.

Complete IRS Form 5329

If you discovered your RMD at tax time, you can attach it to your yearly return. However, you can do this only if the incorrect or insufficient RMD happened in the same tax year. If not, you’ll have to file a standalone Form 5329. And if you missed or took insufficient RMDs for multiple tax years, you must file a separate Form 5329 for each year. Note that you must use the form for the year of the missed RMD and NOT the current tax year; fortunately, the IRS website contains annual versions of Form 5329 going back to the mid-1970s.

Be careful in completing this form. Line 54 is not intuitive. You’ll want to indicate $0 and then write “RC” (for “reasonable cause”) to the left of line 54, along with the amount of RMD that you did not take. Do NOT complete line 54 as directed on the form. If you do, you’ll calculate the amount you will owe a penalty.

If you write $0, you are indicating that there is no shortfall in the RMD.

Accordingly, line 55 should also be $0.

One last piece of advice: do NOT prepay the penalty when you file Form 5329. There is no requirement to do so. If the IRS grants your appeal and waives the penalty, refunding your prepayment may take a long time.

When Should I Expect a Response?

Don’t expect to hear back from the IRS for several months after you file Form 5329. If you include it with your tax return, you can assume the IRS has accepted if you don’t receive a bill for the penalty. Be proactive – if the IRS has to reach out to you, it won’t be as forgiving!

Plan to Stay Compliant

Even with the reduced penalty for not meeting your RMD requirement and the option to delay RMDs, individuals still prefer to avoid giving the government extra money or being caught off guard by the withdrawal amount from their retirement account.

Working with a financial advisor to create a comprehensive financial plan will help protect your retirement from unwanted surprises while reducing your stress levels at tax time — and potentially reducing your overall tax liability. Request a no-cost, no-obligation advisor consultation today to learn more about the benefits of a professionally designed retirement plan!