Definition
- 50% excise tax that is applied to required minimum distribution (RMD) amounts that are not distributed from the retirement plans by the applicable deadline.
- Secure 2.0 reduced this excise tax to 25% from 50%. This excise tax is further reduced to 10% for those who correct the RMD shortfall during a new “correction window”, defined below
- This penalty applies to retirement account owners, as well as beneficiaries who inherit retirement assets and fail to distribute their RMD amounts by the applicable deadline .
The new correction window
The correction window begins on the date on which the excise tax is imposed and ends on the earliest of:
- the date the IRS mails a notice of deficiency regarding the excise tax
- the date on which the excise tax is assessed, or
- the last day of the second taxable year that begins after the end of the taxable year in which the excise tax is imposed.
This provision is effective 2023.
Referring Cite
IRC § 4974, Treas. Reg. §1.401(a)(9)-5, Q&A-8, Treas. Reg. §54.4974-1
Additional Helpful Information
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- The excess accumulation penalty may be waived, if the participant or beneficiary can demonstrate to the IRS that the failure to withdraw the RMD amount in a timely manner was due to reasonable error.[ IRC. §4974(d), IRS Publication 590]
- The penalty is reported on IRS form 5329
- Automatic Waiver of Excess accumulation penalty: If the retirement account owner died before the RBD, and the beneficiary’s distributions are determined under the life-expectancy option (instead of the five year rule) , the excess accumulation penalty is automatically waived if the entire account balance is distributed by the end of the five year period.
