IRS Applies Reduced Excise Tax on Missed IRA Distributions

The Internal Revenue Service applies a tiered excise tax penalty for missed required minimum distributions (RMDs) from inherited IRAs, following rules established by the SECURE Act 2.0. The standard penalty for a distribution shortfall is now 25%, a significant reduction from the previous 50% rate for tax years starting in 2023.

Beneficiaries and retirees can reduce this penalty to 10% if they correct the shortfall within a specific correction window. This window typically lasts until the end of the second calendar year following the missed distribution or until the agency issues a deficiency notice. To qualify for the lower rate, the taxpayer must withdraw the missed funds and file IRS Form 5329.

The agency may grant full waivers of the excise tax if the taxpayer demonstrates reasonable cause for the error, such as illness or poor custodian advice, and shows that prompt steps were taken to remedy the miss. This rule primarily impacts nonspouse beneficiaries who inherit accounts from owners who had already reached their required beginning date, necessitating annual RMDs while fully draining the account within ten years.