Miss the RMD deadline, and the IRS can take a quarter of the amount you failed to withdraw

If you have reached 73 or have been taking money from a traditional IRA or 401(k) for some time, the year-end deadline for your required minimum distribution matters a lot. The IRS requires that withdrawal once you hit that age, and treating the date as optional is an easy way to create an avoidable tax bill.

Even a small shortfall can be costly. If you do not take the full amount, the IRS can impose an excise tax of 25% on the portion you missed. For example, if you were supposed to withdraw $20,000 and took out nothing, the penalty alone would be $5,000, before the regular income tax that will still apply when the money is eventually distributed.

The rule itself is straightforward, but the timing often causes trouble. Financial institutions can get backed up near year-end, paperwork can take longer than expected, and by the time the issue is discovered, the calendar may already have moved into the new year.

Leaving this until the final days of December is how careful savers end up paying a penalty they could have avoided.

Who has to take the withdrawal by year-end

Required minimum distributions begin at age 73 for owners of traditional IRAs, SEP IRAs and SIMPLE IRAs, and the same age generally applies to most workplace retirement plans. There is one exception for the first RMD: it may be delayed until April 1 of the following year rather than taken by the end of the year you turn 73.

That flexibility can create a problem later. If the first RMD is postponed, the next one is still due by year-end, which can lead to two taxable withdrawals in the same tax year. Because of that, many financial advisers recommend taking the first distribution before the end of the year you turn 73 and avoiding the double hit.

After that first year, the deadline is fixed: December 31, with no extra grace period. One exception can apply if you are still working and your 401(k) or 403(b) is with your current employer, as long as you own less than 5% of the business. In that case, RMDs from that specific plan can usually be delayed until retirement. That rule does not apply to IRAs or to old workplace accounts left with a former employer.

What the missed withdrawal costs

The penalty is applied to the amount you failed to withdraw, not to the full account balance. If your required distribution is $18,000 and you take the full amount, you owe only the ordinary income tax on the withdrawal. If you take nothing, the IRS can assess a 25% excise tax on the $18,000 shortfall, which equals $4,500, on top of the tax you will eventually owe when the money is withdrawn.

The current 25% rate is lower than it used to be. Before 2023, the penalty was 50% of the missed amount, which means an $18,000 shortfall could have meant $9,000 in penalties alone under the older rule.

This tax is calculated by account and by year, so multiple misses can add up quickly. If someone skips RMDs from the same IRA for two consecutive years, the IRS can assess a separate penalty for each year’s shortfall. Because custodians file Form 1099-R each year, the IRS can match those reports with the required distribution amount based on age and account balance, so missed withdrawals are not likely to go unnoticed.

How to reduce the penalty after a mistake

If you have already missed an RMD, the best move is to withdraw the missed amount as soon as you discover the mistake. The IRS generally allows a correction period through the end of the second year after the year the distribution was missed, and fixing the error within that window can reduce the excise tax from 25% to 10%.

You report the shortfall and the reduced tax on Form 5329, which is filed with the return for the year the RMD was due. That form can also be used to request a waiver of the tax entirely if you can show that the mistake was reasonable and that you are correcting it.

Reasonable errors can include a custodian’s miscalculation, an account you did not realize had RMD requirements, or confusion between accounts. Simple forgetfulness is less convincing, although the IRS has sometimes waived the penalty when the error was a first-time mistake and the money was promptly withdrawn.

A charitable option that can satisfy the rule without taxable income

If you are 70½ or older, you can move money directly from an IRA to a qualified charity through a qualified charitable distribution. This transfer counts toward your required minimum distribution without being treated as taxable income. For the latest annual limit, you can transfer up to $111,000 this way, and married couples with separate IRAs can each use their own limit.

For example, if your RMD is $20,000 and you send that full amount directly to a charity through this method, the distribution is satisfied and none of it appears as taxable income on your return. The transfer must go directly from the IRA custodian to the charity. If you withdraw the money first and donate it later, it counts as a regular taxable withdrawal.

There is also a one-time rule many people do not know about: up to $55,000 can be used for a charitable gift annuity or charitable remainder trust once in a lifetime, separate from the annual QCD limit. For anyone who already gives to charity, this can be a simple way to meet the deadline while keeping the withdrawal out of taxable income.

How to make sure the money arrives on time

Year-end is the worst time to start an RMD request because custodians are handling a surge of similar transactions from other late filers. It is safer to begin the process in November and confirm that the distribution has actually settled, not just that the request was submitted. A transfer that is still pending when the deadline passes can still count as a missed distribution.

If your IRA holds stocks or funds you do not want to sell at year-end prices, you can usually satisfy the RMD with an in-kind transfer into a taxable brokerage account. The IRS still treats that as a valid distribution, based on the value of the assets on the day they are transferred, so you do not have to sell simply to meet the deadline.

One more detail can cause confusion: if you own more than one IRA, you can calculate the required amount for each account separately but take the total from just one IRA. That rule does not apply to 401(k)s or other workplace plans, where each account’s RMD must come from that specific plan. Mixing up those rules is a common reason people come up short.

Staying compliant does not take much effort. Check that the withdrawal cleared, and then move on to enjoying retirement instead of worrying about avoidable penalties.