Picture this: a retiree juggling three IRAs at different brokerages realizes in March that nobody pulled the required minimum distribution from one of the accounts last year. A decade ago, that oversight would have meant a 50% excise tax on every dollar that should have come out. Today, thanks to the SECURE 2.0 Act, the same mistake usually costs 25% — and if the retiree fixes it quickly, the penalty drops to 10%. File Form 5329 with a short reasonable-cause letter, and there's a good chance the IRS waives the penalty entirely.
The rules changed in late 2022, but plenty of taxpayers, advisors, and even some tax preparers still treat the old 50% number as gospel. That's both unnecessarily alarming and a missed opportunity: the new framework rewards prompt correction in ways the old one didn't. Here's how Form 5329 works under the current rules, what counts as a "missed" RMD, and how to use the two-year correction window before it closes.
The Short History: From a 50% Sledgehammer to a Tiered Penalty
For decades, Internal Revenue Code Section 4974 imposed a flat 50% excise tax on the amount of any required minimum distribution that an IRA owner, qualified plan participant, or non-spouse beneficiary failed to take by the deadline. The penalty was so disproportionate to the underlying mistake — often a paperwork slip or a confused beneficiary — that the IRS routinely waived it for any taxpayer who asked nicely on Form 5329.
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, signed in December 2022, restructured the penalty for tax years beginning after December 29, 2022:
- Default penalty: 25% of the shortfall (the amount that should have been distributed but wasn't).
- Reduced penalty: 10% if the taxpayer takes the missed distribution within a defined "correction window" and files Form 5329 reporting the corrected amount.
- Waiver still available if the shortfall was due to reasonable error and reasonable steps are being taken to remedy it.
The shift sounds like a simple rate cut, but it's actually a behavioral redesign. The old rule gave a uniform 50% penalty and relied entirely on IRS discretion to forgive. The new rule bakes in a self-help discount: act fast, document the fix, and the cost of the mistake plummets without anyone at the IRS having to lift a finger.
What Counts as a "Missed" RMD
The starting point is the RMD itself. Under SECURE 2.0, account owners must begin taking required minimum distributions:
- At age 73 if they reach age 72 after December 31, 2022 and turn 73 before January 1, 2033.
- At age 75 if they turn 73 after December 31, 2032.
The first RMD can be deferred until April 1 of the year after the owner reaches the trigger age (the "required beginning date"). Every subsequent RMD is due by December 31. Delaying that first RMD into the next calendar year stacks two distributions in a single tax year, which can push a retiree into a higher bracket — a separate planning issue, but one worth flagging.
A missed RMD isn't always an obvious case of "I forgot." Common scenarios include:
- A new account that was overlooked when the brokerage's automatic distribution program was set up.
- An inherited IRA where the beneficiary didn't realize annual RMDs were required during the 10-year window (more on this below).
- A miscalculation — the prior-year December 31 balance was wrong, or the wrong life expectancy table was used.
- A trust beneficiary where the trustee assumed the custodian would handle distributions.
- A 73-year-old who rolled a 401(k) into an IRA mid-year and didn't take the plan's portion of the RMD before the rollover.
Each of these counts as a shortfall and triggers Form 5329, even though none of them looks like willful tax avoidance.
The Inherited IRA Trap
Beneficiaries of accounts inherited after 2019 face a particularly thorny set of rules. The 10-year payout rule generally applies to most non-spouse designated beneficiaries: the entire account must be liquidated by the end of the tenth calendar year after the original owner's death. But the final regulations issued by the IRS confirmed a controversial position: if the original owner had already reached their required beginning date before death, the beneficiary must also take annual RMDs during years 1 through 9 of the 10-year window, with the account fully drained by year 10.
The IRS waived enforcement of these annual RMDs for 2021 through 2024 while the rules were being finalized. Beginning with the 2025 distribution year, non-spouse beneficiaries who inherited from someone who had started RMDs must take their annual distributions on time or face the Section 4974 excise tax. A lot of inherited-IRA beneficiaries are walking into 2026 without realizing the grace period has ended.
If you inherited a traditional IRA in 2020 or later and the deceased owner was already taking RMDs, this is the year to verify your distribution schedule. Consider it a free checkup that may save you from filing Form 5329 a year from now.
The 10% Correction Window: How Fast Is "Prompt"?
The discounted 10% penalty applies if the taxpayer takes a corrective distribution within the correction window, defined as the period beginning when the excise tax is imposed and ending on the earliest of:
- The day the IRS mails a notice of deficiency for the tax.
- The day the excise tax is assessed by the IRS.
- The last day of the second taxable year after the year for which the RMD was missed.
In practical terms, for a missed 2025 RMD, the correction window closes on December 31, 2027 — assuming the IRS hasn't already noticed and assessed the tax. Distribute the shortfall before that date, file Form 5329 reporting the 10% rate, and the math works out as follows: a $20,000 shortfall that would have cost $10,000 under the old 50% rule now costs $2,000.
There's nothing to apply for, nothing to attach beyond a clean Form 5329 reflecting the correct numbers. The reduced rate is automatic in the sense that no IRS discretion is required, but the taxpayer still has to file the form to claim it.
Asking for a Full Waiver: Still Worth It
Even with a 10% penalty available, the IRS retains its long-standing authority to waive the excise tax entirely if two conditions are met:
- Reasonable error: the shortfall was caused by something like illness, advisor mistake, custodian error, or family disruption.
- Reasonable steps to remedy: the missed distribution has already been withdrawn (or is being withdrawn) at the time the request is filed.
The IRS has historically been generous with these waivers. Practitioners report near-universal approval when both conditions are clearly documented, and the form makes the request mechanical: file Form 5329, complete Part IX (additional tax on excess accumulation in qualified retirement plans), enter the shortfall, and write "RC" (for "reasonable cause") plus the amount being waived on the dotted line beside line 54a/54b. The dollar amount on the bottom line then reflects only the un-waived portion, which can be zero.
Attach a brief letter — one page is usually enough — explaining:
- What the missed distribution was (account, year, amount).
- Why it was missed (the reasonable error).
- When you took the corrective distribution and the date the funds left the account.
- What you've put in place to prevent recurrence (auto-withdrawals, calendar reminders, advisor review).
Sign and submit. If the IRS disagrees with the waiver request, they'll send a notice — but they almost never do when the corrective distribution has already happened.
Filing Mechanics: Stand-Alone Versus Attached to Form 1040
Form 5329 is most commonly filed as part of the annual Form 1040 return for the year in which the shortfall occurred. But there's an important exception: if the missed RMD is discovered after the tax return has been filed, Form 5329 can be filed as a stand-alone return for the prior year — no amended 1040 required, no recomputation of income tax.
A few practical points:
- The stand-alone Form 5329 must be signed and mailed. It cannot be e-filed on its own.
- Use the form for the year the RMD was missed, not the year you're filing it. If the missed distribution was for 2024 and you're filing in 2026, use the 2024 version of Form 5329.
- Attach any payment for the penalty (if not waived) with a check or money order made out to "United States Treasury," writing the taxpayer's Social Security number and the year on the memo line.
If the corrective distribution itself crosses tax years — say, a 2025 shortfall taken in February 2026 — the corrective distribution is taxable in 2026 (the year it leaves the account), but the Section 4974 excise tax is computed and reported on the 2025 Form 5329.
The Statute of Limitations: An Underappreciated Tweak
Before SECURE 2.0, there was widespread confusion about how long the IRS could assess the missed-RMD penalty. The traditional view held that the statute of limitations didn't start running until Form 5329 was filed, leaving an open-ended window.
SECURE 2.0 clarified this with a statutory limitations period: the IRS generally has three years to assess the excise tax after the taxpayer files a return for the year the RMD was missed — but only if Form 5329 was actually filed reflecting the shortfall. If no Form 5329 was filed, the lookback period stretches to six years.
The takeaway is counterintuitive but important: even when claiming the full waiver, filing Form 5329 starts the clock. Skipping the form leaves the door open for years. Anyone who has not been filing Form 5329 in years where they believed an RMD was properly taken may want to consider doing so prospectively — especially if there's any doubt about whether all accounts were correctly distributed.
A Walked-Through Example
Margaret turned 73 in March 2025. She has two traditional IRAs and one rollover IRA from her former employer. Her financial advisor set up automatic distributions from the two traditional IRAs but didn't realize the rollover IRA was at a different custodian and required a separate request.
December 31, 2025 comes and goes. In February 2026, while preparing her tax return, Margaret's CPA notices the rollover IRA wasn't drawn down. The missed RMD for that account was $12,400.
Here's what Margaret does:
- Take the corrective distribution. She withdraws $12,400 from the rollover IRA on February 18, 2026.
- Complete Part IX of the 2025 Form 5329. She enters $12,400 as the shortfall on line 52, $0 as the amount distributed (for 2025), and writes "RC 12,400" on the dotted line of line 54.
- Compute the penalty as $0. Because she's requesting a full waiver under the reasonable-error standard.
- Attach a one-paragraph letter explaining the rollover-custodian oversight and her advisor's revised process — all three accounts are now on automatic year-end distributions with a December reminder cross-checked against the prior-year December 31 balances.
- File the 2025 Form 5329 with her 2025 Form 1040, even though the corrective distribution itself will be taxable income in 2026 (when she actually receives the $12,400).
If the IRS denies the waiver — unusual in clean cases like this — Margaret falls back on the 10% correction-window rate, owing $1,240 instead of $3,100 under the default 25%. Under the pre-2023 rules, she would have been on the hook for $6,200.
The Most Common Mistakes to Avoid
Across practitioner write-ups and IRS guidance, the same handful of errors keep tripping up taxpayers:
- Forgetting the form when no penalty is owed. A waiver request still requires Form 5329; the form is what tells the IRS what you're asking them to waive.
- Filing Form 5329 with the wrong year's version. The form changes annually; using the current year's form for a prior-year shortfall causes processing delays and sometimes incorrect penalty calculations.
- Forgetting the "RC" notation. Skipping it can cause the IRS to assess the full 25% penalty even when a waiver request is clearly intended.
- Taking the corrective distribution after the correction window closes — most commonly when the shortfall is discovered three or more years later. Once outside the window, the 25% rate applies unless the IRS grants a discretionary waiver.
- Ignoring inherited-IRA annual RMDs during the 10-year window. This is the single biggest emerging issue heading into 2026.
- Failing to coordinate distributions across multiple accounts. Traditional IRAs allow aggregation (you can take the full RMD from any one of them), but 401(k)s and inherited accounts generally don't.
Keep a Paper Trail — Especially for the Reasonable-Cause Story
Whether the penalty ends up at 0%, 10%, or 25%, a missed RMD is one of those situations where contemporaneous documentation matters far more than fancy tax planning. Keep records of:
- The custodian statements showing the missed distribution (or absence of one).
- The corrective distribution confirmation, including the dollar amount and date.
- Any emails or letters from advisors, family members, or doctors that support the reasonable-error narrative.
- Calendar updates, automatic-withdrawal confirmations, or written procedures that show you've fixed the underlying problem.
These records do double duty: they support the waiver request, and they protect the taxpayer if the IRS asks questions during the three- or six-year limitations window.
Keep Your Finances Organized Long Before the RMD Deadline
Catching a missed RMD in February is uncomfortable. Catching it in December — or, better, never missing one — is a function of clean year-round records: knowing which accounts you own, what their year-end balances are, and what's already been distributed. Beancount.io gives you plain-text accounting that's fully transparent, version-controlled, and easy to query, so retirement-account balances and distributions sit in the same ledger as the rest of your financial life. Get started for free and bring your retirement, brokerage, and bank accounts into one auditable view — the kind of system that makes Form 5329 a rare guest rather than an annual fixture.
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