What is the penalty for missing a required minimum distribution?

The penalty is 25% of the amount that should have been distributed, reduced to 10% if corrected within two years under SECURE 2.0. For retirement accounts with substantial balances, this penalty can be tens of thousands of dollars.

IRS Year-End Reminders: Retirement Contributions, RMDs, and Other Deadlines | Lynch Law

Q: Can retirement plan contributions be made after December 31?

It depends on the type. Employee 401(k) deferrals must be made through payroll by December 31. Employer matching and profit-sharing contributions can generally be made up to the extended tax return due date. SEP IRA contributions can also be made until the extended due date.

IRS Year-End Reminders: Retirement Contributions, RMDs, and Other Deadlines

Lynch Law, PLLC

December is filled with tax deadlines that business owners cannot afford to miss. Unlike the April filing deadline—which can be extended—many December 31 deadlines are absolute, with no possibility of extension. Missing these deadlines can result in penalties, lost planning opportunities, and unnecessary tax liability.

Required Minimum Distributions

For individuals age 73 and older (under the current SECURE 2.0 rules), the required minimum distribution (RMD) from traditional IRAs, 401(k) plans, and other tax-deferred retirement accounts must be taken by December 31 of each year. The penalty for failing to take a timely RMD is 25% of the amount that should have been distributed—reduced to 10% if corrected within two years. For retirement accounts with substantial balances, this penalty can be enormous.^[1]

Business owners who are also participants in their company's retirement plan should verify that RMDs have been properly calculated and distributed. The calculation can be complex when multiple retirement accounts are involved, and the rules differ between IRAs (which can be aggregated for RMD purposes) and employer plans (which generally cannot).

Retirement Plan Contributions

Certain retirement plan contributions must be made by December 31 to be deductible for the current year. Defined benefit plan contributions are generally due by the earlier of the plan's funding deadline or the tax return due date (including extensions). Employee salary deferrals to 401(k) plans must be made through payroll by December 31—they cannot be made after year-end. Employer matching and profit-sharing contributions can generally be made up to the extended tax return due date.^[2]

Estimated Tax Payments

The fourth quarter estimated tax payment for calendar year taxpayers is due January 15 of the following year—but business owners who want to avoid underpayment penalties should review their estimated tax position before December 31. If payments are short, increasing withholding on December wages or making an additional estimated tax payment before year-end can help. Withholding is treated as paid evenly throughout the year regardless of when actually withheld, which makes late-year withholding increases a particularly valuable tool for estimated tax penalty avoidance.^[3]

Charitable Contributions

All charitable contributions must be completed by December 31 to be deductible on the current year's return. This includes cash donations, transfers of appreciated property, contributions to donor advised funds, and qualified charitable distributions from IRAs. As discussed in our recent post on year-end charitable giving strategies, the timing of the contribution—not the timing of the payment on a credit card charge or the cashing of a check—determines the year of the deduction.^[4]

Entity Elections and Other Deadlines

Several entity-level elections have December 31 deadlines or require action before year-end. These include the pass-through entity tax elections available in many states, elections to change accounting methods effective for the current year, elections related to bonus depreciation and Section 179 expensing, and the grouping election for real estate professionals. Business owners should review all pending elections with their tax advisors to ensure nothing is missed.^[5]

References

^[1] IRC § 4974 (excise tax on failure to take RMDs; 25% penalty, reduced to 10% if corrected within two years under SECURE 2.0 § 302).
^[2] IRC § 404(a) (deduction timing for employer retirement plan contributions); employee deferrals must be made through payroll during the calendar year.
^[3] IRC § 6654 (estimated tax penalty); Treas. Reg. § 1.6654-2(d) (withholding treated as paid evenly throughout the year regardless of actual timing).
^[4] IRC § 170(a) (charitable deduction limited to contributions made during the taxable year); timing rules for checks, credit card charges, and property transfers.
^[5] See Tax Controversy & IRS Defense (discussing year-end tax compliance and planning deadlines).

This article is for informational purposes only and does not constitute legal advice. The facts of every situation are different, and you should consult with a qualified attorney before taking action based on the information in this article.