Retirement accounts spend decades growing tax-deferred, but the government does not let that arrangement last forever. Once a saver reaches a set age, the IRS requires money to start coming out of most traditional retirement accounts every year — and the penalty for ignoring that requirement is one of the harshest in the tax code. For retirees juggling several accounts, a single overlooked withdrawal can turn into a costly surprise.
The Age-73 Trigger and the Deadlines That Follow
The rule is known as the required minimum distribution, or RMD. Under current law, an account owner generally must begin taking RMDs from traditional IRAs, SEP and SIMPLE IRAs, and workplace plans such as 401(k)s and 403(b)s in the year they turn 73. The IRS’s guidance on required minimum distributions sets that age and explains how the amount is figured each year from the prior year-end balance and a life-expectancy factor.
The first deadline is where people stumble. For the very first RMD, a retiree has until April 1 of the year after turning 73 — but every RMD after that is due by December 31. Waiting until that April 1 grace date means taking two taxable withdrawals in the same calendar year, which can push a retiree into a higher bracket or raise Medicare premiums. Roth IRAs are the notable exception: they carry no RMD during the original owner’s lifetime.
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What the Missed-Withdrawal Penalty Actually Costs
The penalty is an excise tax charged on the shortfall — the difference between what should have been withdrawn and what actually was. For years, that tax stood at a punishing 50 percent. Recent law lowered it, but it is still steep: the excise tax is now 25 percent of the amount not taken. On a $20,000 required distribution that a retiree forgets entirely, that is a $5,000 bill on top of the ordinary income tax owed once the money is finally withdrawn.
There is a meaningful discount for acting quickly. If the retiree corrects the missed distribution within a two-year window and files the right paperwork, the excise tax drops from 25 percent to 10 percent. That provision rewards people who catch the mistake and fix it promptly rather than letting it compound across multiple years.
How to Have the Penalty Waived
The tax is not automatic in every case. The IRS can waive it entirely if the account owner shows the shortfall was due to reasonable error and that reasonable steps are being taken to make it up. In practice, that means withdrawing the missed amount as soon as the mistake is discovered and filing Form 5329 with an explanation. The agency’s RMD FAQs describe the correction and waiver process.
Common reasonable-error situations include serious illness, a death in the family, or an institution’s paperwork failure. The waiver is not guaranteed, but retirees who move quickly and document what happened have a strong case. The worst response is to hope the shortfall goes unnoticed; custodians report account balances to the IRS, and the required amount can be reconstructed.
How the Required Amount Is Calculated
The size of each year’s withdrawal is not left to the retiree’s judgment. The IRS sets it with a formula: the account’s balance as of December 31 of the prior year, divided by a life-expectancy factor drawn from IRS tables. Because the divisor shrinks as a person ages, the required percentage of the account rises year by year — modest in the early 70s and climbing steadily into the 80s and beyond. A retiree does not have to memorize the tables, but understanding that the obligation grows over time helps explain why a withdrawal that felt small at 73 becomes a larger annual event later.
Retirees who do not need the cash have options that still satisfy the rule. The money can be moved into a regular taxable brokerage account or savings, so it stays invested even though it has left the tax-deferred shelter, and a charitably inclined owner can direct the distribution to a qualified charity to meet the requirement without adding to taxable income. The one thing that is not allowed is simply leaving it in the account past the deadline.
Why Multiple Accounts Are Where Retirees Slip
The rules get tangled when a retiree holds several accounts. All traditional IRAs can be aggregated — the total RMD across them can be pulled from any one IRA, which gives some flexibility. Workplace plans are stricter: each 401(k) or 403(b) generally requires its own separate distribution, and money cannot be shuffled between an IRA and a workplace plan to satisfy both. A retiree with an old employer 401(k) sitting untouched is a classic candidate for an accidental shortfall.
The cleanest defense is a calendar reminder set well before December 31, along with a check of every tax-deferred account, not just the one that is easiest to see. Many custodians will calculate the RMD and even set up automatic withdrawals on request. Given a penalty that can reach a quarter of the amount left in the account, the effort to confirm each year’s distribution is modest by comparison — and for a retiree living on a fixed income, avoiding a needless five-figure tax hit is exactly the kind of housekeeping that protects a nest egg.
This article was researched and drafted with the assistance of AI and reviewed 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.
