A Year-End Retirement Deadline That Can Trigger a 25% Penalty

Retirees should keep one key deadline in mind once they reach the required age: taking required minimum distributions, or RMDs, from a 401(k) retirement plan. The cutoff is December 31, and it can be easy to overlook during the busy holiday season.

Below is a look at why RMDs matter and what happens if the deadline is missed.

Why retirees need to pay attention to RMDs

RMDs are mandatory withdrawals from a 401(k) or traditional IRA in retirement. The amount you must withdraw depends on factors such as age and account balance. The IRS requires these distributions to be taken by December 31, and missing the date can lead to steep penalties.

The required age depends on birth year

The starting age for RMDs has changed. Beginning in 2026, retirees must start taking RMDs at age 73. Before that change, the requirement began at age 72. For people born after 1960, the RMD age will eventually rise to 75. Most retirement accounts are subject to this rule, except Roth IRAs and Roth 401(k)s.

Missing the deadline can be costly

If an RMD is not taken by December 31, the IRS can impose a 25% excise tax on the amount that should have been withdrawn. For example, if the required distribution was $10,000, the penalty would be $2,500. For retirees on fixed incomes, that kind of penalty can strain finances. There is, however, a chance to correct the mistake.

If the error is corrected before the end of the next taxable year and Form 5329 is filed, the penalty may be lowered to 10%. The IRS may also waive the penalty entirely, depending on the explanation provided. A financial planner or tax attorney can help determine whether a waiver request may apply.

The first RMD can be delayed, but there is a tradeoff

There is one exception for a first RMD. The IRS allows the initial distribution to be delayed until April 1 of the following year. The downside is that two distributions may then be required in that same year, which can raise taxable income and potentially push a retiree into a higher tax bracket.

Although delaying the first withdrawal can give retirement savings more time to grow, it may also lead to a larger tax bill later. Higher income can also affect Medicare premiums.

Some retirement accounts are exempt

Not every retirement account is subject to RMDs. Roth IRAs and Roth 401(k)s do not require mandatory withdrawals. Funds in those accounts can remain invested for as long as the owner chooses because taxes were already paid on the contributions.

Qualified charitable distributions can satisfy the requirement

For those over age 70.5 with a traditional IRA, a qualified charitable distribution, or QCD, can be another way to meet all or part of the RMD requirement. This allows a direct donation from an IRA to charity. Because the money goes straight to a charitable cause, it does not count as taxable income, which can help retirees manage taxes while supporting a donation.

When in doubt, get professional help

If you are unsure whether you are complying with RMD rules, it is wise to speak with a financial advisor. The rules for combining distributions can vary by account type and may be difficult to interpret.

A financial planner can also verify your earnings and portfolio balance to make sure the correct amount is withdrawn. That extra review can help avoid costly penalties and missed deadlines.

Bottom line

Missing an RMD deadline can be an expensive mistake. Reviewing accounts, calculating withdrawals, and handling year-end requirements early can help retirees avoid an unexpected penalty.

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