3685 / Is there a penalty imposed for failure to comply with IRA required minimum distribution requirements?

A penalty tax is imposed on the participant (IRA owner) if the amount distributed under an IRA for a calendar year is less than the required minimum distribution for the year. The penalty is equal to 25 percent of the amount by which the distribution made in the calendar year falls short of the required amount (the penalty was decreased from 50 percent of the missed RMD for tax years beginning in 2023 and thereafter under the SECURE Act 2.0).¹ The penalty amount is further reduced to 10 percent of the missed RMD if the taxpayer takes all of their missed RMDs and files a tax return paying the required tax and penalty amount before the earlier of (1) receiving a notice of assessment of the RMD penalty tax or (2) two years from the year of the missed RMD.

The penalty generally will be imposed in the calendar year in which the amount was required to be distributed. If the distribution was the first required distribution, and thus was due by April 1 following the calendar year in which the IRA owner reached 73 years old (the required beginning date for 2023-2031), the penalty will be imposed in the calendar year when distributions were to begin even though the required distribution was technically for the preceding year.²

Example: Joan turned 73 on October 26 of 2023. Her first required minimum distribution for 2023 was due by April 1, 2024. Joan did not receive such amount by the April 1 due date. Consequently, Joan will owe a penalty equal to 25 percent of the amount that should have been distributed, which will be imposed on her 2024 tax return.

The penalty tax may be waived if the payee establishes to the satisfaction of the IRS that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.³

---

Planning Point: The SECURE Act 2.0 contained a new three-year statute of limitations in Section 313. Under the law, the penalty only applies for the three years after the year of the missed RMD, after which the penalty cannot be enforced. The language of the SECURE Act leaves room for interpretation as to whether the statute of limitations can be enforced retroactively, and we have yet to receive IRS guidance on the issue. Some experts argue that the three-year statute of limitations only applies to RMDs that are missed after the law was enacted late in 2022. That would leave the penalty pending for RMDs missed before SECURE 2.0 became law. However, the Tax Court has ruled that the SECURE 2.0 Act’s new six-year statute of limitations for excess contribution penalties should not be applied retroactively, making it reasonable to assume that the limitations period for missed RMDs will be interpreted similarly.

---

The minimum distribution requirements will not be treated as violated, and, the 25 percent excise tax will not apply, where a shortfall occurs because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings.⁴

---

Planning Point: To request a waiver of all or part of the 25 percent penalty tax imposed on RMD amounts not distributed on time, a statement of explanation should be filed with Form 5329 for each tax year there is or was a failure to properly take RMDs. The letter must explain the “reasonable error” that caused the failure and the reasonable steps that were taken to correct the error. Although the IRS has not issued guidance on what is a “reasonable error,” possible examples may include illness, death in the family, and notification of RMD not received from the financial institution.

---

---

1. IRC § 4974(a); Treas. Reg. § 54.4974-1.

2. Treas. Reg. §§ 54.4974-2, A-1, 54.4974-2, A-6.