Miss Taking Your RMD? How to Know if You’re Off the Hook for the Excise Tax

If you missed the deadline for taking your 2023 required minimum distribution from your inherited IRA, you owe the IRS an excise tax of 25% of the shortfall. If the deadline was missed because of a reasonable error, the IRS will waive the excise tax if you take steps to remedy the shortfall. But in some cases, the excise tax is automatically waived. The following are instances where the excise tax is automatically waived for your 2023 RMD:

1. You inherited an IRA in 2023, and the owner did not take their 2023 RMD.

If you inherited a traditional IRA, SEP IRA, or Simple IRA (traditional IRA) in 2023 and the owner died on or after their required beginning date, the owner should have taken an RMD for 2023.

For 2023 RMDs, the required beginning date is April 1 of the year that follows the year the IRA owner reached age 72 (70 ½ if they died before 2020).

If the owner did not take their 2023 RMD, you should have taken that RMD by the end of 2023.

Before the publication of the proposed regulations for Secure Act 1.0, you would have owed the IRS the excise tax if such an RMD had not been taken by the end of the year in which the IRA owner died. But the proposed regulations include an automatic waiver provision for such RMDs for taxable years beginning on or after Jan. 1, 2022. Under this provision, the excise tax for the failure to take the RMD for the year of the IRA owner’s death is automatically waived if it is taken no later than the beneficiary’s tax filing deadline, plus extensions. Therefore, if you inherited an IRA in 2023 and the owner did not take their 2023 RMD, the 25% excise tax is automatically waived if you take it by your 2023 tax filing due date (generally April 15, 2024), plus extensions.

Reminder: RMDs do not apply to Roth IRA owners.

2. You are a designated beneficiary who inherited an IRA in 2020, 2021, or 2022, and the owner died on or after their required beginning date.

If you are a designated beneficiary (a person or see-through trust) who is not an eligible designated beneficiary, and you inherited a traditional IRA from someone who died on or after their required beginning date in 2020, 2021, or 2022, you had an RMD due for 2023.

You are not an eligible designated beneficiary unless you are an individual described below who inherited an IRA after 2019:

• The surviving spouse of the IRA owner.
• A child of the IRA owner who has not reached the age of 21.
• Disabled.
• Chronically ill.
• Not more than 10 years younger than the IRA owner.

The IRS issued Notices 2022-53 and 2023-54 explaining that the excise tax is automatically waived for designated beneficiaries described above.

3. You are a successor beneficiary of an eligible designated beneficiary who died in 2020, 2021, or 2022.

For this purpose, an eligible designated beneficiary includes a designated beneficiary who inherited a traditional or Roth IRA before 2020 and was taking distributions under the life expectancy method.

If the eligible designated beneficiary died after 2019, the successor beneficiary must fully distribute the inherited IRA no later than the 10th year after the eligible designated beneficiary’s death. In addition, the successor beneficiary must continue taking distributions over the life expectancy that applied to the eligible designated beneficiary.

The excise tax is automatically waived if you are such a successor beneficiary and did not take your 2023 RMD. This waiver also applies to your 2021 and 2022 RMDs, if any.

Example: Edith inherited a Roth IRA from her sister in 2018. Under the terms of the Roth IRA agreement, Edith must take annual distributions over her life expectancy, beginning no later than 2019.

Edith died in 2020, and Monica inherited the IRA.

Monica must:

• Ensure that the inherited IRA is fully distributed no later than 2030.
• Continue to take annual RMDs over Edith’s life expectancy.

Monica failed to take her RMDs for 2023. The excise tax is automatically waived for 2023. This waiver also applies to 2021 and 2022, if she had not taken any of those RMDs.

4. You are a designated beneficiary who inherited an IRA before 2020, and you switch from the life expectancy rule to the five-year rule.

If the owner of a traditional IRA died before 2020, leaving the IRA to a designated beneficiary, and the death occurred before their required beginning date, the designated beneficiary had two options for taking distributions:

1. The five-year rule, where distributions are optional for the first four years after the owner’s death, and the account must be fully distributed no later than the fifth year. Or,
2. The life expectancy rule, where annual distributions are taken over the beneficiary’s life expectancy, beginning the year following the year of death.

These two options also apply to a Roth IRA beneficiary, regardless of the age of the Roth IRA owner at death.

If a designated beneficiary is subject to the life expectancy rule and failed to take an RMD for a year, they would owe the IRS an excise tax of 50% (reduced to 25% as of 2023) on any RMD shortfall.

However, the excise tax is automatically waived if the beneficiary:

• Did not make an affirmative election to use the life expectancy rule.
• Was subject to the life expectancy rule under the terms of the IRA agreement or RMD regulations.
• Elects for the inherited IRA to be distributed under the five-year rule.

Reminder: Because of the RMD waiver under the Cares Act of 2020, 2020 is not included when counting these five years.

Example: Tyrone inherited a Roth IRA from his aunt in 2018. Under the terms of the Roth IRA agreement, Tyrone must take annual distributions over his life expectancy, beginning no later than 2019.

Tyrone failed to take his RMDs for 2018 and 2019. Tyrone owes the 50% excise tax on the missed RMDs unless he decides to switch to the five-year rule. In Tyrone’s case, the five-year period ends 2024 (extended from 2023 because 2020 is not counted), requiring a full distribution of the inherited Roth IRA no later than 2024.

Please note: This switcheroo option also applies to an eligible designated beneficiary who, in 2020 or later, inherits a Roth IRA or traditional IRA from an owner who died before the required beginning date—except that the five years is increased to 10 years.

No Form 5329 and No Further Action Required for Automatic Waivers of Excise Tax

Generally, IRS Form 5329 must be filed for any RMD not taken by the deadline, whether to pay the excise tax or request a waiver. But no Form 5329 is required when an automatic waiver applies.

If you missed your 2023 RMD deadline and did not qualify for an automatic waiver, your tax preparer must file IRS Form 5329. The process for requesting a waiver of the excise tax includes taking steps to correct the shortfall.

If you inherit assets under an employer plan, please check with the plan administrator to determine your RMD obligations.

Be sure to consult with your tax advisor regarding your RMD obligations and the waiver provisions that may apply to any RMDs you missed.

Denise Appleby has created a book on IRA cheat sheets on IRA rules and regulations. The 2024 version is available: The IRA Quick Reference Guide Book: A compilation of IRA Guides with features, benefits, rules, and tips.