Excess Contribution and RMD Penalties

Two retirement account mistakes can lead to a separate excise tax: putting too much into an IRA, and taking too little out once required distributions begin. Both are easy to make, both are reported on Form 5329, and both can often be corrected. This page explains the 6% tax on excess contributions, the tax on missed required minimum distributions (RMDs) and the SECURE 2.0 changes that reduced the cost of the second one.

Excess contributions

An excess contribution to a traditional IRA is the amount you contribute for the year that is more than the smaller of the IRA limit or your taxable compensation. For 2025, the IRA limit in Publication 590-A is $7,000, or $8,000 if you are 50 or older. The limit applies to the total of your traditional IRA contributions for the year, not to each account separately. Form 5329 also covers excess amounts in Roth IRAs, Coverdell education accounts, Archer medical savings accounts, health savings accounts and ABLE accounts, each with its own part of the form.

The tax. Publication 590-A says an excess contribution is subject to a 6% excise tax. The tax is charged for each year the excess remains in the account.

Example (hypothetical). You are 40 and contribute $8,000 to a traditional IRA for 2025, when the limit is $7,000 and your compensation is higher. The excess is $1,000. If it stays in the account, the tax is 6%, or $60 for 2025. If it remains for 2026, another $60 can apply, unless you correct it.

How to fix it. The publication describes the main fix: withdraw the excess contribution before the due date of the return, including extensions, along with the earnings attributable to it. If you do, the 6% tax does not apply. The earnings are included in your income for the year the contribution was made. Publication 590-A also notes that, starting December 29, 2022, the 10% additional tax on early distributions does not apply to a corrective IRA distribution. If you filed your return on time, the Form 5329 instructions say you may be able to withdraw up to 6 months after the due date, not counting extensions, by filing an amended return marked "Filed pursuant to section 301.9100-2."

Required minimum distributions

After a certain age, you must withdraw a minimum amount each year from traditional IRAs and most employer plans. The IRS pages we reviewed use age 73 for the start date. SECURE 2.0 provides for the age to rise further in a later year, so confirm the age that applies to your birth year. The first RMD for an IRA is due by April 1 of the year after you reach the starting age. Later RMDs are due December 31 each year.

Roth IRA owners, and owners of designated Roth accounts in 401(k) and 403(b) plans, are not required to take withdrawals while they are alive. Beneficiaries of those accounts are subject to RMD rules, including the 10-year rule for many beneficiaries mentioned in the IRS FAQs. The account owner is ultimately responsible for taking the right amount, even if the custodian calculates it.

The RMD excise tax

If you withdraw too little, the shortfall is taxed at 25%. Before SECURE 2.0 the tax was 50%, and that law lowered it to 25% and added a 10% rate if you correct the shortfall within the correction window and file a return reflecting the additional tax. The Form 5329 instructions say the correction window ends on the earliest of three dates: when a notice of deficiency is mailed, when the tax is assessed, or the last day of the second taxable year that begins after the end of the taxable year in which the tax is imposed.

Example (hypothetical). Your RMD is $10,000 and you withdraw $4,000. The shortfall is $6,000. At 25% the tax is $1,500. If you take the missing $6,000 within the correction window, the tax is 10%, or $600. The withdrawal itself is also taxable income.

Asking for a waiver

The IRS can waive all or part of the RMD tax if the shortfall resulted from reasonable error and you are taking reasonable steps to correct it. To ask, you file Form 5329, enter "RC" and the waived amount on the form, attach a letter of explanation, and pay any tax that is not waived. Typical explanations include a custodian error or serious illness, supported by documents. The IRS decides based on the facts, and the waiver is not automatic. If you do not otherwise have to file a tax return, Form 5329 is filed by itself and cannot be e-filed. See also the general reasonable cause penalty relief page.

How to avoid problems

• Track total contributions across all of your IRAs, since the limit applies to the total.
• Set up automatic RMD withdrawals each year and confirm the calculation with the custodian.
• If you notice a mistake, fix it quickly because the correction window and the return due date matter.

Read our guide to IRA and 401(k) contributions for the contribution rules, and our page on the 10% early withdrawal tax for the opposite problem.

How we can help

We can review your contribution history, work out whether an excess exists, calculate RMDs and shortfalls, prepare Form 5329 and the waiver letter, and plan withdrawals for retirees. This is a regular part of our tax planning work for seniors and retirees. We cannot promise the IRS will grant a waiver, but a prompt correction with a clear explanation gives the request its strongest footing. Contact us to review your accounts.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.