The 25% Tax Penalty on Inherited IRAs That Drops to 10% Only if You Fix It Fast Enough

Miss a required distribution from an inherited IRA and the IRS wants 25% of what you should have taken. Catch it in time and that number falls to 10%. Miss the second deadline too and the full penalty sticks.

On a $20,000 missed distribution, that is the difference between a $5,000 check and a $2,000 one. On $60,000, it is $15,000 versus $6,000. The rule lives in a corner of SECURE Act 2.0 that most beneficiaries never see coming.

Penalty Structure Congress Rewrote in 2023

Before 2023, blowing a required minimum distribution triggered a 50% excise tax under Internal Revenue Code Section 4974. SECURE 2.0 cut that headline number to 25% for tax years starting in 2023, and added a second door: fix the shortfall inside the “correction window” and the penalty drops to 10%.

The correction window generally runs through the end of the second calendar year after the year the RMD was missed, or until the IRS mails a deficiency notice, whichever comes first. Miss a 2026 distribution and the reduced-penalty deadline is roughly December 31, 2028.

Why Inherited IRAs Trip This Wire So Often

Nonspouse beneficiaries who inherit a traditional IRA after 2019 fall under the SECURE Act’s 10-year maximum to drain the account. What confused everyone for four years was whether annual RMDs still applied inside those ten years.

The IRS settled it. If the original owner had already reached their required beginning date, the beneficiary must start taking annual RMDs the year after the owner died and continue every year, with the account fully drained by the end of the tenth year. Skip a year and the excise tax fires.

As Justyn Volesko of Cerity Partners noted, “Missing an RMD on an inherited IRA is sometimes the biggest surprise, particularly because of the associated penalty.”

Worked Example in Real Dollars

Consider a 58-year-old who inherited a $400,000 traditional IRA from a parent who died in 2024 at age 78. The parent was already taking RMDs, so the son owes annual distributions in years one through nine and must empty the account by December 31, 2034.

Using the Single Life Table divisor for age 58, roughly 27.0, the 2025 RMD comes to about $14,815. He forgets. In 2026, he owes 25% of $14,815, or about $3,704 in excise tax on top of ordinary income tax when he eventually takes the distribution.

If he catches the miss by December 31, 2027, withdraws the $14,815, and files Form 5329 within the correction window, the penalty drops to about $1,481. Same mistake, $2,223 saved.

Form 5329 and the Waiver Nobody Files

The reduced 10% rate is not automatic. The beneficiary must take the missed distribution, then file IRS Form 5329 for the year the RMD was missed, reporting the shortfall and calculating the excise tax at 10%.

The IRS allows a full waiver request for “reasonable cause.” The taxpayer files Form 5329, writes “RC” and the amount requested in the margin, and attaches a letter explaining what happened and confirming the missed amount has been withdrawn. The IRS grants these liberally for genuine oversights, illness, or bad custodian advice.

Who Escapes the Rule Entirely

Surviving spouses can roll an inherited IRA into their own and follow their own RMD schedule. Minor children of the decedent, disabled or chronically ill beneficiaries, and heirs less than 10 years younger than the decedent are “eligible designated beneficiaries” and can generally stretch distributions over their life expectancy rather than the 10-year clock.

Everyone else, the adult children who inherit most IRAs in this country, lives under the annual-RMD-plus-10-year regime. That is the population the 25% penalty was built for, and it is one of nine IRS rules that quietly drain retirement accounts, all charted in our free tax trap map.

The Move Most Heirs Miss

Ask the custodian, in writing, whether the original owner had begun RMDs before death. That single answer determines whether annual distributions are required inside the 10-year window or whether the account can compound and drain in year ten. Getting it wrong in either direction costs real money.

Coordinating an inherited IRA drawdown with Roth conversions, Social Security timing, and IRMAA thresholds is worth running with a CPA or fiduciary advisor before the first distribution, not after the first penalty notice.

Data Sources

• Kiplinger: The Hidden Costs of Inheriting an Investment Portfolio supplied the 25% and 10% penalty figures, the correction-window framing, and the Volesko quote on beneficiary surprise.
• Suze Orman’s Women & Money podcast episodes on the SECURE Act and inherited IRAs supplied the 10-year rule mechanics and the IRS clarification that beneficiaries of owners already taking RMDs must continue annual distributions.

Contact [email protected] for any questions or corrections.