The IRS Tax Trap That Hits Retirees With 25% Penalties (And How to Avoid It)

My Dad Almost Paid a Huge Penalty

True story: my dad turned 72, got a letter from his IRA custodian about something called "RMDs," and promptly filed it away. He figured he'd deal with it later.

Two years later, his accountant nearly had a heart attack. Dad had missed TWO Required Minimum Distributions and owed a 50% penalty on the amounts he should have withdrawn.

That was $18,000 in penalties. For not withdrawing money he would've paid taxes on anyway.

Don't be like my dad. Let me explain RMDs so you can avoid this expensive mistake.

What the Heck Is an RMD?

RMD stands for Required Minimum Distribution. It's the minimum amount you MUST withdraw from your retirement accounts each year once you reach a certain age.

The IRS wants their tax money eventually. Since Traditional IRAs and 401(k)s grew tax-deferred, they're forcing you to take the money out and pay taxes on it.

Think of it this way: you got a tax break going in, now it's time to pay up.

When Do RMDs Start?

This has changed a few times, so pay attention:

If you were born in 1950 or earlier: You should have started at 70½ or 72.

If you were born 1951-1959: Your RMDs start at age 73.

If you were born 1960 or later: Your RMDs start at age 75 (starting in 2033).

The SECURE 2.0 Act pushed back the starting age, which is great news if you don't need the money yet.

Which Accounts Have RMDs?

Accounts WITH RMDs:

• Traditional IRA
• SEP IRA
• SIMPLE IRA
• 401(k), 403(b), 457(b)
• Inherited Roth IRAs (yes, even Roth if you inherited it)

Accounts WITHOUT RMDs:

• Roth IRA (for the original owner)
• Roth 401(k) (as of 2026, finally!)
• Health Savings Accounts (HSAs)

This is one of the big advantages of Roth accounts. No forced withdrawals ever.

How to Calculate Your RMD

Here's the formula:

RMD = Account Balance ÷ Life Expectancy Factor

The account balance is what you had on December 31 of the previous year.

The life expectancy factor comes from IRS tables. Here are some examples:

Example: You're 75 with $500,000 in your IRA.

$500,000 ÷ 24.6 = $20,325

You MUST withdraw at least $20,325 this year.

Use our RMD Calculator to get your exact number.

The Deadlines You Can't Miss

First RMD: Due by April 1 of the year AFTER you turn the RMD age.

All other RMDs: Due by December 31 each year.

Warning about delaying your first RMD:

If you delay your first RMD until April 1, you'll have to take TWO RMDs in the same tax year (the delayed first one plus the current year's). This could push you into a higher tax bracket. Not ideal.

The Penalty Is No Joke

Miss your RMD deadline and the IRS hits you with a penalty of:

• 25% of the amount you should have withdrawn (reduced from 50% by SECURE 2.0)
• 10% if you fix it within 2 years

On a $20,000 RMD, that's a $5,000 penalty for forgetting. Plus you still have to withdraw the money AND pay regular income taxes on it.

There's a waiver process if you have a reasonable excuse, but don't count on it.

What If I Have Multiple Accounts?

Great question, because this trips people up.

IRAs: Calculate the RMD for each IRA separately, but you can take the TOTAL from any combination of your IRAs. You don't have to withdraw from each one.

401(k)s and other employer plans: You MUST take the RMD from EACH account separately. No combining allowed.

Example: You have two IRAs ($300,000 and $200,000) and one 401(k) ($400,000).

• IRA #1 RMD: $12,000
• IRA #2 RMD: $8,000
• 401(k) RMD: $16,000

You could take the full $20,000 IRA total from just IRA #1 if you wanted. But the $16,000 from the 401(k) must come from that specific 401(k).

Strategies to Reduce the RMD Tax Hit

1. Do Roth Conversions Before RMDs Start

In your 60s, consider converting some Traditional IRA money to Roth. You'll pay taxes now at potentially lower rates, reduce future RMDs, and create tax-free income later.

2. Qualified Charitable Distributions (QCDs)

If you're 70½ or older, you can donate up to $100,000 directly from your IRA to charity. This counts toward your RMD but isn't included in your taxable income.

You don't get to itemize the deduction, but it's even better - the money is never considered income at all.

3. Consider Delaying Social Security

If RMDs will push you into a higher bracket, delaying Social Security might reduce your overall tax burden. Every situation is different, so run the numbers.

4. Don't Wait Until December

Taking your RMD early in the year gives you more flexibility. If the market drops, you've already withdrawn. If it rises, at least you didn't panic and overtake.

5. Reinvest in Taxable Accounts

Just because you have to withdraw doesn't mean you have to spend. Move the money to a regular brokerage account and keep it invested.

What Happens to RMDs When You Die?

Your beneficiaries will have their own RMD rules:

Spouse: Can roll the account into their own IRA and use their own life expectancy.

Non-spouse (after 2020): Generally must withdraw the entire account within 10 years. No more "stretch IRA" for most beneficiaries.

Eligible designated beneficiaries: Minor children, disabled individuals, and those close in age to the deceased can still stretch distributions.

This is why some people prefer Roth conversions - no RMDs, and beneficiaries get tax-free money.

RMD Amounts by Age: How Much You Must Withdraw

To understand the scale of RMDs, here is a comprehensive table showing required withdrawals at different ages for various account balances:

RMD Amounts for a $500,000 IRA Balance

RMD Amounts for a $1,000,000 IRA Balance

Notice how RMDs accelerate with age. At 73, you withdraw about 3.8%. By 90, it is over 8%. If your account has grown significantly, these withdrawals can push you into higher tax brackets, trigger Medicare surcharges (IRMAA), and increase Social Security taxation.

Use our RMD Calculator to project your specific RMD amounts for the next 20+ years based on your actual balance.

Five RMD Reduction Strategies in Detail

Strategy 1: Roth Conversions Before Age 73

This is the single most powerful RMD reduction strategy. Convert Traditional IRA money to Roth IRA during your 60s, when you may be in a lower tax bracket between retirement and RMD age.

Example: Linda, age 62, has $800,000 in her Traditional IRA and a small pension covering expenses. She converts $50,000 per year from ages 62-72 (11 years = $550,000 converted).

• Tax paid on conversions: approximately $110,000 (at 22% average rate)
• Remaining Traditional IRA at 73 (with growth): approximately $400,000
• RMD at 73 on $400,000: $15,094 (instead of $45,283 on the full $1.2M with growth)
• Annual tax savings on RMDs: $6,600+ per year for the rest of her life

The Roth money grows tax-free, has no RMDs, and passes to heirs tax-free. Model your Roth conversion strategy with our Roth IRA Calculator.

Strategy 2: Qualified Charitable Distributions (QCDs)

If you are 70-1/2 or older and donate to charity, QCDs let you send up to $105,000 per year (2026 limit, indexed for inflation) directly from your IRA to a qualified charity. This counts toward your RMD but is NOT included in your taxable income.

Example: Robert, age 75, has a $30,000 RMD and donates $10,000 per year to his church. By making the donation as a QCD:

• $10,000 goes directly from his IRA to the church
• His taxable RMD drops from $30,000 to $20,000
• At the 22% bracket, he saves $2,200 in taxes
• He does not need to itemize to get this benefit

Strategy 3: Spend Down Your Traditional IRA Strategically

If you have multiple income sources, consider withdrawing from your Traditional IRA first in early retirement (before RMDs kick in). This reduces the balance that generates future RMDs.

Strategy 4: Contribute to Roth Accounts During Working Years

Every dollar that goes into a Roth 401(k) or Roth IRA instead of a Traditional account is a dollar that will never be subject to RMDs. Starting early with Roth contributions means a smaller Traditional balance at 73.

Strategy 5: Consider the QLAC Strategy

A Qualified Longevity Annuity Contract (QLAC) lets you move up to $200,000 from your IRA into a deferred annuity that starts paying at age 80-85. The QLAC amount is excluded from your RMD calculation, reducing withdrawals during your 70s.

Tax Impact of RMDs: How Withdrawals Affect Your Entire Tax Picture

RMDs do not exist in isolation. They interact with your other income sources and can trigger cascading tax consequences:

Example: Tom, age 75, has $40,000 in Social Security, $20,000 pension, and a $50,000 RMD. Total income: $110,000.

• Without the RMD: 22% federal bracket, $0 IRMAA, minimal SS taxation
• With the RMD: 24% bracket, $1,800 IRMAA surcharge, 85% of SS taxable
• Extra taxes caused by the RMD: approximately $14,500

Check how your RMDs will interact with your other income using our Tax Bracket Calculator. For a complete picture of your retirement income streams, use our Retirement Income Calculator.

RMD Mistakes I've Seen

Taking the wrong amount

Using the wrong balance (current year instead of previous Dec 31) or wrong life expectancy factor. Always double-check.

Forgetting about old 401(k)s

That 401(k) you left at your old job 15 years ago? It needs RMDs too. Consolidate your accounts so nothing slips through the cracks.

Not planning for the tax hit

A $50,000 RMD plus Social Security plus pension could push you into the 24% bracket. Plan your withdrawals throughout the year.

Assuming your custodian will handle it

Your IRA custodian will calculate your RMD and send you a notice. But it's YOUR responsibility to actually take the withdrawal. Don't assume they'll do it automatically.

My RMD Checklist

Every year, before December:

Check my account balance from last December 31

Calculate my RMD using the RMD Calculator

Decide how to take it (cash, transfer, QCD)

Take the withdrawal by December 15 (I give myself buffer time)

Keep records of the withdrawal

Plan for the tax payment

The Silver Lining

Look, RMDs aren't all bad. That money in your IRA? You saved it for retirement. Now you're in retirement. It's time to use it.

Many people are so focused on saving that they forget to actually enjoy their money. RMDs force you to take some out. Maybe that's not the worst thing.

Calculate Your RMD Now

Don't wait until you're 72 to think about this. Use our RMD Calculator to:

• See your projected RMDs for the next 20 years
• Understand how RMDs will affect your account balance over time
• Plan Roth conversions before RMDs start

The more you plan ahead, the less you'll pay in taxes and penalties.

Your future 73-year-old self will thank you.

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