A 73-year-old retiree with $500,000 sitting in a traditional IRA owes the IRS a required minimum distribution of roughly $18,868 this year. Skip that withdrawal entirely by December 31, and the penalty alone comes to about $4,717, calculated as 25% of the missed amount. That is on top of whatever ordinary income tax is eventually due when the money finally comes out.
This is not a theoretical risk. The excise tax is codified in 26 U.S. Code Section 4974, and it applies every single year a shortfall exists. For retirees who spent decades building wealth inside tax-deferred accounts, one overlooked deadline can erase years of careful saving in a single tax bill.
Why the starting age shifted to 73
For years, most retirement account owners had to begin taking distributions at age 72. That changed when the SECURE 2.0 Act, enacted as Division T of Public Law 117-328 in December 2022, pushed the trigger age to 73 for anyone born on or after January 1, 1951. The provision, codified in Internal Revenue Code Section 401(a)(9)(C) and detailed in Internal Revenue Bulletin 2024-02, gives workers one additional year of tax-deferred growth before mandatory withdrawals kick in.
Another increase is already on the calendar: starting in 2033, the RMD age rises to 75 for people born in 1960 or later. But for anyone turning 73 between now and 2032, the current rules apply without exception.
There is one narrow grace period worth knowing about. Retirees in their first RMD year may delay the initial withdrawal until April 1 of the following year, per IRS Publication 575. The trade-off is steep: delaying forces two full taxable distributions into a single calendar year. That can push a taxpayer into a higher federal bracket and, just as painfully, trigger income-related monthly adjustment amounts (IRMAA) on Medicare Part B and Part D premiums. As of 2025, a single filer whose modified adjusted gross income exceeds $106,000 pays higher Medicare premiums, and the surcharges climb in steps up to $594.00 per month for Part B alone at the highest income tier, according to CMS premium tables. Doubling up on RMDs is one of the fastest ways to cross those thresholds. After the first distribution year, every subsequent RMD must be completed by December 31.
How the 25% penalty works
The calculation is straightforward. The IRS compares the amount a retiree was required to withdraw for the year against the amount actually taken. The 25% excise tax applies to the gap. If the required distribution was $20,000 and the retiree withdrew only $12,000, the penalty hits the $8,000 shortfall, producing a $2,000 excise tax bill that is entirely separate from ordinary income tax on the distribution itself.
Before SECURE 2.0, the excise tax was a punishing 50% of the shortfall. The reduction to 25% was a real concession, but Congress added a further incentive to act quickly: if a retiree corrects the missed distribution within a defined correction window, the rate drops to 10%. The IRS outlines this mechanism on its RMD guidance page. Generally, the correction must happen by the date the excise tax return is due (including extensions) for the year the shortfall occurred. To claim the reduced rate, the taxpayer must withdraw the missed amount and file Form 5329 reporting the excise tax and the correction.
Because the penalty applies per year, a retiree who misses distributions in back-to-back years faces compounding damage. On a $600,000 account, two consecutive years of missed RMDs could generate well over $10,000 in excise taxes before any income tax enters the picture.
How your RMD amount is calculated
Each year’s required distribution starts with the account balance as of December 31 of the prior year. That balance is divided by a life expectancy factor from IRS tables, most commonly the Uniform Lifetime Table. For a 73-year-old, the current divisor is 26.5; for a 78-year-old, it drops to 22.0, meaning the required percentage of the account grows larger every year. The IRS publishes the applicable tables and account types on its retirement topics page.
Most custodians now estimate the RMD for each client and display it on year-end statements or online dashboards. But the legal responsibility to withdraw the correct amount on time belongs entirely to the account owner, not the brokerage or plan administrator.
The rules cover traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and most other tax-deferred employer plans. Several important exceptions apply:
- Roth IRAs: Original owners of Roth IRAs owe no RMDs during their lifetime. SECURE 2.0 also eliminated RMDs for designated Roth accounts inside employer plans (such as Roth 401(k)s) starting in 2024, removing what had been a persistent reason to roll Roth 401(k) balances into Roth IRAs.
- Still-working exception: Participants in an employer-sponsored plan who are still employed by that specific company and do not own more than 5% of the business can generally delay RMDs from that employer’s plan until they retire. This does not apply to IRAs, and it does not cover old 401(k)s left at former employers.
- Inherited accounts: Beneficiaries who inherit retirement accounts face a separate and more complex set of distribution rules. Most non-spouse beneficiaries must empty the inherited account within 10 years under SECURE Act and SECURE 2.0 provisions. The IRS has continued to refine this guidance through proposed and final regulations, and the rules differ depending on whether the original owner had already begun taking RMDs.
Aggregation rules that trip people up
Retirees who hold multiple accounts need to understand a critical distinction. If you own several traditional IRAs, the IRS calculates a separate RMD for each one, but you are allowed to add those amounts together and withdraw the total from any one (or any combination) of your IRAs. That flexibility does not extend to employer plans. A 401(k) RMD must be taken from that specific 401(k). A 403(b) RMD can be aggregated with other 403(b) accounts, but not with IRAs or 401(k)s.
This is where mistakes happen. A retiree who rolls an old 401(k) into an IRA mid-year, for example, may assume the rollover resets the clock. It does not. The RMD for the 401(k) must be satisfied before the rollover, or the excess amount rolled over could be treated as an ineligible rollover contribution, creating a separate tax problem.
Steps to take before December 31
The rules are precise, but execution is where people stumble. Here are concrete steps for anyone approaching or already past age 73:
- Confirm your RMD amount in writing. Contact your custodian and request a written calculation for the current year. Cross-check it against your own estimate using the IRS Uniform Lifetime Table and your December 31 prior-year balance.
- Build in processing time. A distribution requested in late December may not settle until January, which means it would not count for the current tax year. Aim to have the withdrawal initiated by mid-November at the latest.
- Set up automatic distributions. Most major custodians offer automatic RMD withdrawals on a monthly, quarterly, or annual schedule. Automating the process removes the risk of forgetting entirely.
- Check your IRS account. The agency’s online account portal can confirm whether an excise tax has been posted or whether correspondence about a missed distribution is pending.
- Correct mistakes immediately. If you realize you missed or shorted a distribution, withdraw the remaining amount as soon as possible and file Form 5329. Correcting within the statutory window can cut the penalty from 25% to 10%.
- Consider qualified charitable distributions (QCDs). Account owners aged 70½ or older can direct up to $108,000 per year (the 2025 indexed limit; the 2026 figure will be announced by the IRS later this year) from a traditional IRA directly to a qualifying charity. The amount satisfies the RMD but is excluded from taxable income, which can also help keep income below IRMAA thresholds.
Roth conversions as a long-term RMD strategy
For retirees who do not need every dollar of their RMD for living expenses, converting a portion of traditional IRA or 401(k) balances to a Roth IRA in lower-income years can reduce future RMDs permanently. Roth conversions are taxable in the year they occur, but once the money is in a Roth IRA, it grows tax-free and is not subject to RMDs during the owner’s lifetime. This strategy works best when started several years before RMDs begin, but even partial conversions after age 73 can shrink the tax-deferred balance that drives next year’s required withdrawal.
The math is personal and depends on current versus expected future tax rates, state income taxes, and Medicare premium implications. But ignoring the option entirely means accepting that every dollar in a traditional account will eventually be forced out on the IRS’s schedule, not yours.
Why the IRS is not going to waive this
Congress did not create RMDs to punish retirees. These rules exist because the federal government deferred tax on every dollar that went into traditional retirement accounts, and it expects that revenue back. The December 31 deadline and the 25% penalty are the enforcement tools: withdraw on schedule, or pay a surcharge that makes procrastination very expensive.
The SECURE 2.0 changes softened the timeline and cut the penalty rate, but they did not eliminate the underlying obligation. For anyone born in 1951 or later who holds money in a traditional IRA, a 401(k), or a similar tax-deferred account, the annual withdrawal requirement is now a permanent feature of retirement. Treating it as a routine task you handle in October or November, rather than something you scramble to address in the final days of December, is the simplest way to keep the IRS out of your retirement savings.
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.
