Americans turning 73 this year face a federal tax rule that can quietly drain thousands of dollars from their retirement savings if they miss a single deadline. Traditional IRA and workplace plan holders must begin pulling money out of those accounts once they hit age 73, and the penalty for falling short is steep: a 25 percent excise tax on whatever amount they failed to withdraw.
Why the Age-73 RMD Trigger Catches Retirees Off Guard
Required minimum distributions are not optional. The IRS explains that mandatory withdrawals generally apply starting the year the account owner reaches age 73, a threshold set by SECURE 2.0 legislation. The agency calculates each year’s required amount by dividing the prior year-end account balance by a life expectancy factor published in IRS Publication 590-B tables, according to the agency’s official FAQs.
That formula creates a direct link between market performance and the size of a retiree’s obligation. When account balances swell during a strong year, the following year’s RMD rises in lockstep, even if markets have since reversed. A retiree who turned 73 right after a sharp rally could owe a distribution based on a peak balance that no longer exists, making it harder to meet the full withdrawal without selling assets at a loss. No public IRS data tracks how many taxpayers actually fall short under these conditions, but the mechanical relationship between prior-year balances and current-year obligations means volatile markets raise the practical difficulty of compliance for new RMD filers.
Another source of confusion is timing. For the first year an RMD applies, retirees are generally allowed to delay that initial withdrawal until April 1 of the following year. While that delay can offer short-term breathing room, it also means two RMDs may be due in the same calendar year-the deferred first-year amount plus the second-year requirement. That double hit can unexpectedly boost taxable income, potentially nudging retirees into a higher bracket or affecting means-tested benefits.
The 25 Percent Excise Tax and the Correction Window
Missing an RMD is not a paperwork error that the IRS overlooks. Under 26 U.S. Code Section 4974, if distributed amounts fall below the minimum required, a tax equal to 25 percent of the shortfall is imposed. On a $20,000 RMD shortfall, that translates to $5,000 owed to the IRS on top of any regular income tax due on the distribution itself.
SECURE 2.0 did soften the blow in one respect. The Internal Revenue Bulletin 2024-19 confirms that the excise tax drops to 10 percent if the retiree corrects the shortfall by the end of the second tax year after the year the RMD was missed. That correction window gives account holders roughly two calendar years to withdraw the missing amount and file the appropriate form, but the reduced rate only applies if they act within that deadline. After the window closes, the full 25 percent rate locks in.
The difference between 10 percent and 25 percent on the same shortfall is real money. On a $30,000 missed distribution, a timely correction costs $3,000 in excise tax. Waiting too long raises that bill to $7,500. Retirees who discover a missed RMD should withdraw the shortfall amount as soon as possible and consult a tax professional about filing IRS Form 5329 to report the error and compute any excise tax due. Acting quickly preserves eligibility for the lower rate and can also limit the compounding impact of additional missed years.
Coordinating Multiple Accounts and Employer Plans
The rules become more complex for retirees juggling several retirement accounts. For traditional IRAs, the IRS allows owners to calculate the RMD separately for each IRA but then satisfy the combined total from one or more of those IRAs in any proportion they choose. That flexibility does not extend to most employer-sponsored plans such as 401(k)s and 403(b)s, where each account typically has its own distinct RMD that must be withdrawn from that specific plan.
Complications can arise when retirees leave old workplace plans scattered across former employers. Losing track of one small 401(k) can still trigger a penalty if its RMD is overlooked. Consolidating eligible accounts well before age 73 and keeping a detailed inventory of all tax-deferred balances can reduce the chance that a stray account causes an unexpected excise tax bill.
Monitoring IRS Records and Fixing Problems Early
Because custodians report distributions and year-end balances directly to the government, the IRS has independent records of what retirees withdraw each year. Taxpayers who are unsure whether the agency has flagged a problem can use the online account portal to review their transcripts, notices, and payment history. While that system does not replace professional advice, it can reveal whether the IRS has already assessed an excise tax or issued a warning about a suspected shortfall.
For those nearing or just past age 73, the most effective defense is building an annual routine around RMDs: confirming the required amount with each custodian, scheduling distributions well before year-end, and documenting when and how the withdrawals were made. Given the size of the potential penalty, even retirees who prefer to reinvest their withdrawals in taxable accounts may find that taking RMDs on time is a necessary cost of enjoying years of tax-deferred growth.
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.
