You were supposed to take a 2025 required minimum distribution (RMD) from your retirement account, but it slipped your mind. Now you're facing a 25% penalty tax, which is almost certainly more than you would have paid in taxes had you taken the RMD on time.
It's a frustrating situation, but you may have another option besides begrudgingly paying the bill. The IRS offers a little-known way to reduce your penalty, or maybe even avoid it altogether.
Image source: Getty Images.
The first step is to take your 2025 RMD as soon as possible. To calculate yours, you'll need to know what your retirement account balance was as of Dec. 31, 2024. You may need to check with your plan administrator to figure this out.
Once you've taken your RMD, you'll need to fill out Form 5329 and file it with your 2025 tax return. If you've already submitted your 2025 return, you'll need to submit an amended return that includes this form.
If you do this within two years of the missed RMD deadline, the IRS will drop the penalty from 25% to 10%. Or it may waive the penalty altogether if you can prove that your failure to take your RMD as scheduled was due to a reasonable error that you've corrected. You can attach a letter of explanation to your Form 5329 explaining what happened.
There's no guarantee that the IRS will ignore the penalty, but it's worth a shot. In the worst-case scenario, you'll have the penalty reduced, which could still save you quite a bit.
