What is the Penalty for Not Taking RMDs?
Retirement savings vehicles such as traditional IRAs and 401(k)s feature many benefits that can help you prepare for retirement—but they also come with required minimum distributions (RMDs) that can trigger penalties if not taken. Proper planning and education regarding the same, however, can help you avoid unnecessary expenses and make the most of your retirement savings.
What is an RMD?
Required minimum distributions (RMDs) are mandatory withdrawals from tax-deferred retirement savings accounts and other qualified retirement plans, the IRS enforcing these to ensure tax-advantaged savings don’t remain untaxed indefinitely. Failing to take an RMD in a timely manner can result in a significant penalty: a 25% excise tax on the amount not withdrawn (often reduced to 10% if corrected quickly).
Since RMDs are considered taxable income, they can impact your overall tax liability, Medicare premiums, and even Social Security taxation. It’s therefore important to consider these when creating your overall financial plan to both avoid penalties and make the most of your hard-earned savings.
When are you required to take RMDs?
RMDs kick in at age 73, though you do have a bit of wiggle room the first year and can withdraw the minimum amount from eligible accounts anytime up until April 1st the year after you turn 73. From that point forward, withdrawals must be taken annually by the end of every calendar year. Waiting until April 1st to take your first RMD, however, means you’ll need to take two distributions in the same tax year—for the prior and current year—which can push you into a higher tax bracket. Consider this example…
John turns 73 on August 15, 2025 and must therefore take his first RMD by April 1, 2026. If he delays this until April 2026, however, he’ll also need to take his 2026 RMD by December 31 of that same year: giving him two taxable distributions in 2026, potentially increasing his income tax liability. John may thus choose to take his first RMD before the end of 2025 to avoid this.
Which accounts have RMDs?
RMDs apply to most, but not all, retirement savings accounts including:
Profit-sharing plans
403(b)s
457(b)s
IRA-based plans (e.g., SEPs and SIMPLE IRAs)
The exception here is Roth IRAs or designated Roth accounts, for which the owner is still alive. If inherited, though, RMD rules apply to beneficiaries. It’s also worth noting that RMDs reflect the minimum you must take. Want to take a larger distribution? You can in fact do so—assuming this aligns with your larger financial plan—without incurring any penalties.
How to calculate RMDs
RMD amounts are calculated based on your account balance as of December 31st of the previous year and a life expectancy factor determined by IRS actuarial tables. The formula for calculating RMDs is as follows:
RMD = Account Balance on December 31 of the Previous Year/Life Expectancy Factor
Step-by-Step Calculation
Find your account balance: Use the total balance of your tax-deferred retirement accounts as of December 31 of the prior year.
Determine your life expectancy factor: This number is based on the IRS Uniform Lifetime Table, estimating how many years you’re expected to live.
Divide your balance by the factor: This gives you the minimum amount you must withdraw for the year.
Consider this example…
Susan is 75 years old in 2025 and has a traditional IRA with a balance of $500,000 as of December 31, 2025. According to the IRS Uniform Lifetime Table, her life expectancy factor at age 75 is 24.6. We would therefore divide $500,000 by 24.6 to come up with an RMD of $20,325 for Susan, who must therefore withdraw at least this much in 2025 to satisfy her RMD requirement. This amount is then taxed as ordinary income unless she donates it through a qualified charitable distribution (QCD) or takes other tax-efficient steps (more on that later).
Minimum distribution penalties
Failing to take an RMD by the required deadline can trigger a penalty—25% of the amount not withdrawn—unless the mistake is corrected by the end of the next tax year, in which case the penalty may be reduced to 10%. Let’s return to Susan…
Susan is required to withdraw at least $20,325 from her traditional IRA in 2025. Let’s say she forgets to take her RMD by the December 31, 2025 deadline—facing a penalty of $5,081 in addition to eventually withdrawing and paying income tax on the missed RMD—but realizes her mistake in January 2026. She thus takes the RMD in this month instead, files the appropriate paperwork with the IRS, and is able to secure a reduced penalty (10% of the missed RMD): $2,032 (10%) rather than $5,081 (25%).
Of course, avoiding penalties altogether is preferable—which is precisely why retirees should carefully track their RMD deadlines and consider automatic withdrawals or work with a financial advisor to ensure compliance.
Steps to take if you miss the RMD deadline
Pull a Susan and forgot to take your RMD for the year? Don’t panic! Here’s what to do:
1. Take the missed RMD immediately
Withdraw the required amount as soon as possible, knowing the IRS expects retirees to correct the mistake promptly and that taking the distribution now can help reduce potential penalties.
2. Calculate the penalty
The penalty for missing an RMD is 25% of the amount not withdrawn, but if you correct the error in a timely manner (usually by the end of the following tax year) the penalty may be reduced to 10%.
3. File IRS Form 5329
To report the missed RMD, complete and submit IRS Form 5329 (Additional Taxes on Qualified Plans) along with your tax return. Should you qualify for the reduced penalty, this form will help document the correction.
4. Request a penalty waiver
If you have “reasonable cause” for missing the deadline (e.g., an illness, financial hardship, or an administrative error), the IRS may waive the penalty altogether. To request a waiver, attach a letter to your Form 5329 explaining why you missed the RMD and how you’ve corrected the issue. File the form with your regular tax return, knowing the IRS reviews waiver requests on a case-by-case basis and may grant relief if they find the reason valid—though of course there are no guarantees.
Managing RMDs to avoid penalties
Previously missed taking your RMD? Consider why. Were you in the dark about the need to do so? Did you take a portion but not the full amount? Did you simply forget? To quote one popular adage, “An ounce of prevention is worth a pound of cure.” Whether you need to set an annual reminder on your phone or work with a financial advisor, the best way to avoid another penalty is to learn from your mistake and avoid making the same one twice. Here are some specific strategies you can implement to help manage RMDs and avoid costly penalties (note some of these repeat information shared earlier).
1. Set up automatic withdrawals
Many financial institutions allow you to schedule automatic RMD withdrawals—ensuring you never miss the deadline—either monthly, quarterly, or annually depending on your preference and cash flow needs.
2. Consolidate retirement accounts
If you have multiple traditional IRAs, 401(k)s, or 403(b)s, keeping track of RMDs for each one can be overwhelming. Consolidating these accounts, however, can simplify RMD calculations and withdrawals: reducing the risk of missing a required distribution. Keep your larger financial plan in mind while doing so, remembering potential tax implications of these consolidations.
3. Take your RMD early
While the IRS allows you to take your first RMD as late as April 1st of the year after you turn 73, delaying means you’ll have to take two RMDs in the same tax year—potentially pushing you into a higher tax bracket. Taking RMDs earlier in the year ensures compliance and helps manage taxable income more effectively.
4. Employ tax-efficient strategies
To reduce RMD tax impacts, consider:
· Qualified charitable distributions (QCDs): If you’re age 70½ or older, you can donate up to $100,000 per year directly from your IRA to a qualified charity and exclude the amount from taxable income.
· Roth conversions: Converting a portion of your traditional IRA to a Roth IRA before reaching RMD age can reduce future RMDs as Roth IRAs don’t have RMDs during your lifetime.
· Strategic withdrawals: Taking withdrawals from taxable accounts before tax-deferred accounts can help lower future RMDs and manage tax liability over time.
5. Consider working with a financial advisor
A financial advisor can provide personalized RMD planning guidance. Besides ensuring your RMDs are calculated accurately, partnering with a financial advisor can help make your withdrawals strategic, tax-efficient, and aligned with your long-term financial goals.
The takeaway: RMD penalties
Don’t let a missed deadline eat into your hard-earned retirement savings. Incorporate RMDs into your larger financial plan and consider working with a financial advisor to help ensure you avoid costly mistakes.
Still have questions about RMDs? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.