For most of a working life, a traditional IRA or 401(k) grows without a tax bill each year. That arrangement does not last forever. The federal government eventually requires the money to start coming out, and the rule that forces the issue is the required minimum distribution. Missing one is one of the most expensive mistakes a retiree can make, because the penalty is calculated on the amount that should have been withdrawn.
Why the required minimum distribution starts at age 73
A required minimum distribution, or RMD, is the smallest amount that must be pulled from most tax-deferred retirement accounts each year once a saver reaches a set age. Under current law, that age is 73. The Internal Revenue Service explains the trigger in its required minimum distribution FAQs, which spell out that traditional IRAs, SEP and SIMPLE IRAs, and workplace plans such as 401(k) and 403(b) accounts all fall under the requirement.
The logic is straightforward. Contributions to these accounts were usually made with pretax dollars, and the earnings compounded untaxed for decades. The RMD is the point at which the deferral ends and the government collects income tax it had been waiting on. Roth IRAs are the notable exception during the original owner’s lifetime, since those contributions were already taxed.
The first distribution has a small timing wrinkle. A retiree who turns 73 may wait until April 1 of the following year to take that initial RMD. Delaying it, though, means two distributions land in the same tax year, which can push a household into a higher bracket. After that first year, each RMD is due by December 31.
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How a 25% penalty can shrink to 10%
The cost of skipping a distribution is where the rule turns punishing. When a required amount is not withdrawn on time, the IRS applies an excise tax on the shortfall. That penalty is 25% of the amount that should have come out but did not. On a $20,000 distribution that was overlooked, the tax alone would be $5,000, on top of the ordinary income tax owed once the money is finally taken.
There is a meaningful escape hatch. Under the SECURE 2.0 Act, the penalty drops from 25% to 10% if the missed distribution is corrected within a two-year window and the proper forms are filed. The IRS lays out the mechanics in its overview of retirement plan required minimum distributions. Acting quickly after catching the error is what separates a 10% bill from a 25% one.
The calculation of each year’s RMD depends on two figures: the account balance as of December 31 the year before, and a life-expectancy factor published by the IRS. Dividing the balance by that factor produces the year’s required amount. Custodians often calculate and even offer to distribute the figure automatically, but the legal responsibility for taking it rests with the account owner, not the brokerage.
Where retirees most often trip on the rules
Several situations catch older savers off guard. A retiree who holds multiple IRAs may add the required amounts together and take the total from a single account, but that flexibility does not extend to 401(k) plans, where each plan’s RMD generally must be taken from that plan. Mixing up the two is a common source of shortfalls.
Inherited accounts carry their own timelines, which changed sharply after the SECURE Act reshaped the rules for many non-spouse beneficiaries. A beneficiary who assumes an inherited IRA follows the same schedule as the original owner can easily fall behind. Anyone managing an inherited account should confirm the specific deadline that applies rather than guessing.
The account type is another frequent stumbling point. Roth IRAs never require distributions during the original owner’s lifetime, and under SECURE 2.0 the same is now true of designated Roth accounts inside a workplace 401(k) or 403(b), which no longer force withdrawals while the worker is alive. A retiree who mistakenly believes a Roth balance must be tapped may pull money out unnecessarily, giving up years of tax-free growth. Traditional balances in the same accounts, however, remain fully subject to the requirement, so a saver with both types has to keep the two straight.
One strategy can turn the requirement into a tax advantage. A qualified charitable distribution allows an IRA owner who is at least 70 and a half to send money directly from the account to a qualifying charity, and that transfer can count toward the RMD while staying out of taxable income. The IRS describes the option in its guidance on qualified charitable distributions. For a charitably inclined retiree, satisfying the distribution this way can lower a tax bill that would otherwise arrive with the withdrawal.
The through-line across all of these situations is the same: the required minimum distribution is not optional, the deadline is firm, and the penalty for a miss is steep. A retiree who marks the December 31 due date, confirms the correct amount with the custodian, and moves fast to fix any oversight keeps the full 25% excise tax from ever coming into play.
This article was created with AI assistance and was reviewed, edited, and fact-checked by The Financial Wire editorial team.
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David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
