What Are Qualified Retirement Plans Under Section 4974(c)?

Internal Revenue Code Section 4974 establishes a tax penalty for failing to take required minimum distributions (RMDs) from specific retirement accounts. These rules are designed to ensure that individuals do not indefinitely defer taxes on their retirement savings. When a retirement account owner fails to withdraw the mandated amount by the annual deadline, they become subject to an excise tax. This provision of the tax code defines which retirement plans fall under this rule and the consequences for non-compliance.

The Excise Tax on Missed RMDs

A Required Minimum Distribution is the minimum amount you must withdraw from your retirement account each year once you reach a certain age. The starting age for these withdrawals is 73 for individuals born between 1951 and 1959, and it increases to 75 for those born in 1960 or later. These withdrawals are treated as taxable income. Failing to take your RMD, or taking less than the required amount, results in an excise tax on the shortfall.

Under the SECURE 2.0 Act of 2022, the excise tax for missed RMDs was reduced from 50% to 25% of the shortfall amount. For example, if your RMD for the year was $12,000 and you only withdrew $7,000, the shortfall is $5,000. The excise tax would be 25% of that $5,000, resulting in a $1,250 penalty.

If the account owner withdraws the RMD shortfall and files a corrected tax return within a specific “correction window,” the penalty is reduced from 25% to 10%. This window closes at the end of the second year following the year the RMD was missed.

Plans Subject to the RMD Excise Tax

Section 4974(c) of the Internal Revenue Code specifies that the RMD rules and associated excise tax apply to qualified retirement plans. The plans subject to these rules include:

• Plans under Section 401(a), such as 401(k)s, profit-sharing plans, and defined benefit pension plans.
• Annuity plans under Section 403(a) and annuity contracts under Section 403(b), often for employees of public schools and non-profits.
• Individual Retirement Arrangements (IRAs), including traditional IRAs under Section 408(a), individual retirement annuities under Section 408(b), SEP IRAs, and SIMPLE IRAs.
• Governmental plans and eligible deferred compensation plans under Section 457(b) for state and local government employees.

Roth accounts are an exception. Roth IRAs do not require RMDs for the original account owner. As of 2024, this rule also applies to designated Roth accounts in employer plans, such as Roth 401(k)s. However, beneficiaries of all Roth accounts are subject to RMD rules after the owner’s death.

Reporting the Tax and Requesting a Waiver

If you fail to take the correct RMD, you must report the excise tax to the IRS using Form 5329, “Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.” On the form, you will calculate the tax owed based on the RMD shortfall, which is the difference between the required and actual withdrawal amounts.

The form should be filed with your federal income tax return for the year the RMD was missed. For instance, if you missed an RMD for the 2024 tax year, you would file Form 5329 with your 2024 tax return in 2025.

The IRS may waive the penalty if the failure to take the RMD was due to a reasonable error and you are taking steps to remedy the shortfall. To request a waiver, you must file Form 5329 and attach a letter of explanation. The letter should detail the reasons for the error and confirm that you have since withdrawn the required amount.

When requesting a waiver, enter “0” on the line for the tax amount and do not pay the penalty with your return. The IRS will notify you if the request is denied and payment is required.