For decades, a traditional retirement account lets savings grow untaxed. The government eventually wants its share, and it enforces that with one of the harshest penalties in the tax code. Retirees who forget to pull out the required amount each year — or who miscalculate it — can hand the IRS a quarter of the money they were supposed to withdraw. The rule is unforgiving, but there is a built-in escape hatch that most people never hear about until it is too late.
Required minimum distributions, and the penalty for skipping one
Traditional IRAs, 401(k)s and similar tax-deferred accounts carry required minimum distributions, or RMDs — a set amount the owner must take out each year once they reach the starting age. The IRS calculates each year’s RMD by dividing the account balance from the end of the prior year by a life-expectancy factor from its published tables, and the required amount rises as a person ages. Skip it, take too little, or miss the deadline, and the shortfall is hit with an excise tax. That penalty applies to the amount that should have been withdrawn but was not — so a retiree who was supposed to take $20,000 and took nothing faces the tax on the full $20,000, on top of the ordinary income tax owed once the money finally comes out.
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How 25% can drop to 10%
The penalty used to be a flat 50% of the missed amount, one of the steepest in federal law. The SECURE 2.0 Act cut it to 25%. More importantly, it added a correction window: if the retiree takes the missed distribution and files the right paperwork within a set correction period — generally the end of the second year after the mistake, and sooner in some cases — the penalty falls to 10%. The correction is not automatic. A retiree who catches the error has to actually withdraw the shortfall and report it on Form 5329, the return the IRS uses for these penalties. The agency can also waive the tax entirely for a reasonable-cause mistake, but only for those who fix the shortfall and ask. Ignoring it and hoping the IRS does not notice is the one response that guarantees the full charge.
The starting age is a moving target
Part of what trips people up is that the age to begin taking RMDs has shifted twice in recent years. Under current law the requirement starts at 73, and it is scheduled to rise to 75 in 2033. That means someone turning 73 this year has a first RMD due, while a slightly younger saver may have a few more years before the clock starts. The first year carries a quirk of its own: a retiree can delay that very first distribution until April 1 of the following year, but doing so forces two taxable withdrawals into a single year, which can inflate income enough to raise taxes on Social Security or push up Medicare premiums. Many advisers steer clients to take the first RMD in the year they turn the starting age precisely to avoid that pile-up.
Where the mistake most often happens
The retirees who get burned are usually not careless — they are the ones with several accounts. RMDs must be calculated for each traditional account, and the rules for combining them differ. Multiple IRAs can be totaled and the full amount pulled from any one of them, but a 401(k) generally must have its own RMD taken from that specific plan. A person juggling an old workplace plan, a rollover IRA and an inherited account can easily satisfy one and overlook another. Inherited accounts add another layer, since many non-spouse heirs now face a separate 10-year drawdown rule with its own annual requirements.
One category of account escapes the whole problem. A Roth IRA carries no required distributions during the original owner’s lifetime, because the money was already taxed going in. That difference is a planning tool: converting some traditional savings to a Roth in lower-income years, or before RMDs begin, shrinks the balance that will later be forced out and taxed. It does not erase RMDs on the traditional accounts that remain, but it reduces how much the mandatory-withdrawal machine can reach.
The practical defense against the penalty is a calendar and a total. Anyone 73 or older with tax-deferred savings should confirm the required amount for every account and make sure the combined withdrawal is out before December 31. A retiree who discovers a missed distribution should not wait: taking the shortfall promptly and filing Form 5329 is the difference between a 10% charge and a 25% one — and, in many cases, between a penalty and a waiver.
This article was researched and drafted with the assistance of AI and reviewed by The Financial Wire editorial team.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
