You were supposed to take a required minimum distribution (RMD) from your retirement account by Dec. 31, 2025. You planned to do it, but you lost track of it in the busyness of the holidays, and now you're staring at a 25% tax penalty that could cost you thousands of dollars.
It's a frustrating situation, especially when you're already tight on cash and living on a fixed income. But there is a way to reduce what you owe -- as long as you act fast.
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How to reduce your RMD tax penalty to 10%
The IRS understands that mistakes happen, which is why it gives you the opportunity to correct your mistake in a timely fashion. If you take your RMD within two years, it will drop your penalty from 25% of the untaken RMD to 10%. This could result in significant savings, especially if your RMD was large.
To do this, you'll also need to complete Form 5329 and submit it along with your tax return for the year in question. If you submitted your tax return before you took your RMD, you may need to file an amended return that includes this form.
You will owe ordinary income taxes on the RMD amount. Your tax filing software or accountant should be able to help you calculate how much this will come out to. An accountant can also help you work out what your 2026 RMD will be, so you can come up with a plan to avoid future penalties.
You may be able to waive the penalty
The IRS may permit you to waive the RMD penalty altogether if you can prove that your failure to take your RMD as scheduled was the result of a reasonable error, and that you've taken steps to correct that error.
You'll need to take your RMD as soon as you can and submit Form 5329 with your tax return, as mentioned above. You'll also want to attach a letter to this form explaining why you didn't complete your RMD by Dec. 31, 2025.
The IRS will review this when deciding whether to waive your penalty. If it decides you do not qualify, it will reach out to let you know if you owe anything further.
Create a plan for your 2026 RMD now
You don't have to take your 2026 RMD right now if you don't want to. But it doesn't hurt to plan when you're going to, so you don't run into huge retirement tax bills again. You might decide to take a portion of your RMD each month. Or you might wait until the end of the year to do so.
Any option is fine as long as you complete your RMD by Dec. 31, 2026. If you need to, set reminders for yourself so you don't forget to take your withdrawal.
