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How do I claim an exception to IRS early withdrawal and missed RMD excise penalty taxes?
How do I claim an exception to IRS early withdrawal and missed RMD excise penalty taxes?
Updated over a week ago

Two of the most common IRS-imposed excise penalty taxes incurred by 401(k) participants or IRA owners are:

  • RMD excess accumulation penalty tax: Applied when required minimum distributions (RMDs) are not taken on time.

  • Early distribution penalty tax: A 10% penalty applied to distributions taken before reaching the age of 59 ½.

Luckily, you may be able to reduce, or even eliminate, the excise penalty tax by filing IRS Form 5329.

Missed or incomplete RMDs

While the IRS allows individuals to save for retirement tax-deferred in various ways, at a certain point you must start taking those assets out of the tax-deferred accounts. You can find more information on when you must begin taking RMDs from your IRA here and from your 401(k) plan here but, generally, once these distributions start, they are due by December 31 each year.

If you miss the RMD deadline, or only take a portion of your RMD due for the year, you will owe the IRS an excise penalty tax equal to 25% (50% for RMDs due for the 2022 and earlier tax years) of the RMD that you did not timely distribute. You would use IRS Form 5329 to report this penalty but you may also use the form to claim a reduced or waived penalty in some cases.

When you might be eligible for a reduced or waived penalty

Starting for RMDs due for the 2023 tax year, this penalty can be reduced to 10% if certain requirements are met. To qualify for the reduced penalty, you will need to:

  • Remove the full RMD amount within two years of the date the RMD was due (or when you receive notice of deficiency from the IRS, if earlier), and

  • Submit a corrected tax return for the year the RMD was missed.

Finally, in certain circumstances, the IRS may waive the penalty all together. In order to qualify for this waiver, you must be able to establish that the failure to take the RMD was due to reasonable error and that you are taking appropriate steps to correct the error and ensure it does not happen again. You should consult with a tax advisor if you wish to apply for the RMD waiver.

Withdrawals prior to age 59 ½

Because IRA and 401(k) accounts are intended for retirement savings, the IRS imposes a 10% excise penalty tax on the taxable amount if you take a distribution prior to reaching age 59 ½ and don’t roll that money into another IRA or retirement plan.

When you might be eligible for a reduced or waived penalty

There are numerous exceptions to the early withdrawal penalty tax. While the Form 1099-R you receive from your IRA or 401(k) custodian often does not show that you qualify for one of these exemptions, you may still be eligible. The IRS recognizes that IRA and 401(k) custodians simply do not always have the information to determine if one of the exemptions apply. Therefore, you may still be able to claim a relevant exemption when filing your taxes.

This article is for informational purposes only and is not to be construed as tax advice. For more information, consult a qualified tax advisor.

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