A required minimum distribution is not merely a suggested retirement withdrawal. Missing all or part of it can create an excise tax equal to 25% of the shortfall, although timely correction can reduce the rate to 10%. The penalty falls on the amount not withdrawn, making calculation errors and forgotten accounts potentially expensive even when an investment portfolio had a good year.
The shortfall, not the account, is taxed
The IRS states in Publication 571 that a missed required distribution produces a nondeductible 25% excise tax on the difference between the amount required and the amount actually distributed. Correction within the specified time can lower the rate to 10%.
If an RMD was $20,000 and only $12,000 came out, the shortfall is $8,000. The headline tax would be $2,000 at 25% or $800 at 10%, not a percentage of the full account balance.
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Age and account type set the first deadline
The IRS RMD questions and answers explain beginning ages, account coverage and annual deadlines. Traditional IRAs and many employer plans are subject to distributions; Roth IRAs owned by the original participant generally are not during that owner’s life.
The first distribution may be delayed until April 1 of the following year for eligible owners, but doing so can bunch the first and second RMDs into one tax year. That can increase taxable income, Medicare income-related premiums or taxation of Social Security.
Multiple accounts do not always combine the same way
Traditional IRA RMDs are calculated separately but can generally be withdrawn in aggregate from one or more IRAs. Employer-plan RMDs usually must be satisfied from each plan separately. Similar-looking account statements can therefore hide different distribution rules.
Inherited accounts follow beneficiary rules that depend on the owner’s death date, relationship and other status. A custodian’s automated amount can be useful, but the taxpayer remains responsible for the correct total when records are incomplete or accounts moved.
Correction requires both money movement and tax reporting
Discovering a shortfall should lead to a prompt distribution of the missing amount. The correction date affects whether the reduced 10% rate is available. A later withdrawal does not erase the fact that the original deadline was missed.
Form 5329 reports additional taxes on retirement plans, including RMD failures. IRS instructions also provide a process for requesting waiver of the tax when the shortfall resulted from reasonable error and reasonable steps are being taken to remedy it.
Custodian defaults can create December surprises
Common failure points include an old 401(k), a transfer completed late in the year, an incorrect prior-year-end balance or an automatic withdrawal that was never updated. Beneficiaries may also confuse a cash distribution with an in-kind transfer that did not leave the tax-deferred account.
A year-end checklist can list every covered account, prior December 31 balance, applicable divisor, calculated RMD, payments already made and remaining amount. Completion should be confirmed by settlement date, not merely by a request submitted on the last business day.
Withholding can make an RMD serve two jobs
An RMD is generally taxable income, and federal or state withholding can be taken from a distribution. Withholding reduces the cash deposited but still generally counts as part of the gross distribution for satisfying the RMD.
The current IRS sources confirm both penalty rates while leaving room for fact-specific correction and waiver analysis. The safest financial result comes from finding a shortfall before the calendar closes; the next-best result is correcting it promptly and documenting exactly how the error occurred.
Qualified charitable distributions can satisfy part or all of an IRA RMD when statutory requirements are met, but the transfer must go directly from the IRA custodian to an eligible charity. A personal check written after an IRA withdrawal does not convert the distribution retroactively. Year-end charity processing delays make early instructions and written acknowledgment especially important.
Market declines do not generally recalculate an RMD already based on the prior December 31 balance. A portfolio that falls sharply in the distribution year can therefore owe a withdrawal that represents a larger percentage of current assets. Cash reserves or an in-kind distribution of securities can avoid selling at an unwanted moment, although an in-kind distribution still creates taxable income and needs a reliable market value.
Automatic RMD services need annual review after rollovers, beneficiary changes and account closures. A custodian sees only assets held on its platform and may not know that an employer plan requires a separate payment. Consolidation can simplify tracking, but a rollover completed without checking an outstanding RMD may itself create errors because a current-year required amount generally cannot be rolled over. The tax rates reward fast correction, but prevention remains cheaper.
Taxpayers requesting a waiver should keep custodian correspondence that proves the error and correction date. A concise chronology—required amount, distribution actually made, discovery, corrective payment and procedural change—gives the IRS a concrete record. Merely asserting that the deadline was forgotten does not document reasonable steps to prevent recurrence.
This article was researched and drafted with AI assistance and reviewed against the linked primary sources.
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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.
