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For most US taxpayers, we’ve resigned ourselves to the fact taxes are inevitable. But one thing that no one wants to deal with are penalties. Especially one that is avoidable.
Avoiding penalties in retirement is all the more important for retirees since the tax rules change significantly.
For many retirees, knowing the rules are important, and we’ll discuss a common fear that many have with RMDs, and one rule that can help someone who has properly planned, or potentially increase tax for retirees who improperly plan.
What Is a Required Minimum Distribution?
A Required Minimum Distribution is an amount the IRS forces you to take from your pre-tax retirement accounts each year, starting at a certain age. These distributions are taxed as ordinary income in the year you take them.
While a common complaint among retirees is that the IRS forces you to take the funds out, it’s also true the IRS gave you a tax break when you contributed to your pre-tax 401(k) or IRA.
Those contributions reduced your taxable income, and the growth has been tax-deferred for decades.
When Do RMDs Start?
The starting age depends on your date of birth.
If you were born between 1951 and 1959, your RMDs begin the year you turn 73.
If you were born 1960 or after, your RMDs begin the year you turn 75.
Whether you turn that age in January or December doesn’t matter. The IRS requires the distribution for the year in which you reach that age.
401(k) vs. IRA RMD Rules – They’re Not the Same
Most people assume 401(k)s and IRAs work identically when it comes to RMDs. They don’t.
For IRAs: If you’re of RMD age, you must take your distribution. There’s no exception for working or not working.
For 401(k)s: There’s a key exception. If you’re still working at the company that sponsors your current 401(k), and you’re not more than a 5% owner of that company, you do NOT have to take an RMD from that specific 401(k).
But of note: this exception only applies to your CURRENT employer’s plan.
If you have old 401(k)s from previous employers sitting in your name, you’re required to take RMDs from those plans, even if you’re still working full-time and covered by your current employer’s plan.
This can trip people up. They assume that because they’re still working, they don’t have to take any RMDs. Then they discover that the 401(k) from the job they left 15 years ago has been sitting there, and the IRS expected distributions to begin at the required beginning age.
The lesson: Know where every old 401(k) you’ve ever had is sitting. If you have orphaned accounts from previous jobs, they’re subject to RMDs once you hit the required age.
Unneeded Withdrawals: Qualified Charitable Distributions (QCDs)
If you have an IRA and you don’t actually need the RMD income, there’s a powerful tool worth knowing about: the Qualified Charitable Distribution, or QCD.
A QCD allows you to direct your RMD amount (up to certain annual limits) directly from your IRA to a qualifying charity. The amount you direct to charity counts toward satisfying your RMD requirement, and importantly from a tax perspective, doesn’t show up as taxable income on your return.
If you take a $20,000 RMD as ordinary income, that $20,000 is taxed at your marginal rate. If you direct that same $20,000 to charity via a QCD, you’ve satisfied your RMD requirement AND avoided having that income hit your tax return.
For charitably inclined retirees, QCDs are often more efficient than donating cash because:
- The RMD requirement is satisfied
- You avoid increasing your AGI
- This can help with Social Security taxation
- This can help with IRMAA brackets
- You don’t need to itemize to benefit (unlike normal charitable deductions)
There’s a process to follow and annual limits to be aware of, but if you’re charitably inclined and you have an IRA RMD coming, this strategy should be on your radar.
Roth Accounts: Different Rules
One more important note before we get into mistakes.
Roth IRAs have never had RMDs during the original owner’s lifetime. As of 2024, Roth 401(k)s also no longer have RMDs.
This means if you have money in a Roth IRA or Roth 401(k), the IRS isn’t going to force you to take distributions from those accounts. You can leave them growing tax-free as long as you’d like.
This is one of the reasons Roth conversions can be such a powerful planning tool, since converted dollars escape the RMD requirement permanently.
Mistake #1: Missing an RMD Entirely
In terms of penalties, this is one that most retirees fear.
If you miss an RMD, the IRS imposes an excise tax of 25% on the amount you should have taken.
So if your RMD was $10,000 and you didn’t take it, you’d owe $2,500 in excise tax – on top of still needing to take the distribution itself.
But assuming you have reasonable cause for your missed RMD, there is good news: it’s almost always fixable.
How to Fix a Missed RMD
The IRS provides a path to correct this. Here’s the process.
Step 1: Take the missed distribution as soon as you realize the mistake.
Don’t wait. Get the money out of the account in the year you catch the error.
Step 2: File Form 5329.
This is the form for reporting additional taxes on qualified plans. It’s where you document the missed RMD and request a waiver of the penalty.
Step 3: Attach a reasonable cause letter.
Along with Form 5329, you’ll attach a letter explaining why you missed the RMD. Common acceptable reasons include illness, family emergencies, advisor error, account oversight, or other genuine causes.
Step 4: Take corrective action going forward.
Show the IRS that you’ve taken the distribution and that you have a system in place to avoid missing future RMDs.
What Happens After You File?
The IRS typically operates on what’s called “implied consent” with these waivers.
No news is good news.
If you file Form 5329 with a reasonable cause letter and the IRS doesn’t respond, the waiver is generally considered granted. The 25% excise tax can be waived entirely.
If you don’t catch the error and the IRS catches it first, you’ll likely owe the full 25%. Catch it within two years and self-correct, the penalty may be reduced to 10%. If you file properly with the reasonable cause letter, it may be waived entirely.
The important point: don’t panic. Take corrective action.
What If You Missed RMDs for Years?
This happens more often than you’d think. People forget about old IRA accounts. They move and stop getting statements. They lose track of accounts at custodians they don’t think about anymore.
I’ve seen situations where someone missed RMDs for 10+ years on a forgotten account.
Here’s the good news: you don’t have to amend 10 years of tax returns.
The approach is to take the necessary distribution in the year you catch the mistake, file ONE Form 5329 for that year, include a reasonable cause letter explaining the long-running oversight, and have all that income taxed in the current year.
It’s not ideal – taking 10 years of accumulated RMDs in a single year can push you into much higher tax brackets. But it’s better than the alternative of being caught by the IRS without having tried to fix it.
Mistake #2: The Delayed First-Year RMD Trap
The IRS gives you a special option for your very first RMD. You can delay it until April 1st of the year following the year you turn RMD age.
So if you turn 73 in 2026, your first RMD is technically due by December 31, 2026. But you have the option to delay until April 1, 2027.
This can be a worthwhile feature for some, but it can also create more tax if planned improperly.
If you delay your first RMD into the following year, you have to take TWO RMDs in that year.
You’ll take the delayed first-year RMD by April 1st of that year, AND you’ll take your second-year RMD by December 31st of that same year.
The Three Hidden Costs of Doubled-Up RMDs
When two RMDs hit the same tax year, several bad things can happen at once.
Cost #1: Higher Tax Brackets
The most obvious problem. Two RMDs is roughly twice the taxable income from RMDs in a single year. This can push you into a higher marginal tax bracket. It can also push your long-term capital gains and qualified dividends into a higher capital gains bracket.
If your RMD is small, this might not matter much. If it’s substantial, the bracket creep can cost you.
Cost #2: The Social Security Tax Torpedo
This is the cost many retirees miss, in part due to how complex Social Security benefit taxation can be.
The taxability of your Social Security benefits depends on your provisional income. As your provisional income rises, more of your Social Security becomes taxable – up to a maximum of 85%.
If you’re already at 85% Social Security taxability, this isn’t a concern. But if you’re below 85%, an additional RMD can push more of your Social Security into the taxable column.
For every additional dollar of RMD income, you might effectively add closer to $2 of taxable income – $1 from the RMD itself, and another $1 from previously-untaxed Social Security suddenly becoming taxable.
This is the Social Security tax torpedo. And doubled-up RMDs are one of the most reliable ways to trigger it, since it often affects lower income earners.
Cost #3: IRMAA Surcharges on Medicare
Medicare Part B and Part D premiums increase as your Modified Adjusted Gross Income (MAGI) crosses certain thresholds. These are called IRMAA surcharges, and they operate on a cliff schedule. By crossing a threshold by even $1 and your surcharges jump.
The IRMAA brackets are based on your MAGI from TWO years prior.
So if you take two RMDs in 2026 and that pushes you over an IRMAA threshold, you won’t feel the impact until 2028. But when 2028 comes, you’ll be paying higher Medicare premiums for the entire year because of what you did in 2026.
A retiree who innocently delays their first RMD to “save” themselves a tax hit in the current year may end up paying significantly more two years later through higher Medicare costs.
When Delaying CAN Make Sense
I don’t want to suggest that delaying the first RMD is always wrong.
There are situations where it makes perfect sense:
If you’re still working at age 73 with a substantial earned income and plan to retire the following year, delaying might smooth out your tax brackets across the two years.
If you have an unusually high-income year at 73 (sale of a business, major capital gain event, etc.), delaying can push the RMD into a year with more headroom.
You’ve coordinated with your tax advisor or financial planner and modeled both scenarios specifically for your situation.
But the default assumption shouldn’t be “delay because I can.” The default should be “take it in the year required unless analysis shows otherwise.”
You can also consider a partial approach – take part of the RMD in the current year and the remainder before April 1st of the following year – to soften the impact.
What to Do If You Have Multiple 401(k)s
One more important wrinkle worth knowing.
For IRAs: You can aggregate. If you have three IRAs, you can calculate the total RMD across all three and take the entire distribution from just one of them. The IRS doesn’t care which IRA you take it from, as long as the total RMD is satisfied.
For 401(k)s: You cannot aggregate. Each 401(k) must satisfy its own RMD individually. You can’t take your old employer’s 401(k) RMD out of your IRA, and you can’t satisfy two old 401(k) RMDs by taking the total amount from one of them.
If you have multiple 401(k)s from previous employers, you must take a separate RMD from each one. This is often a good reason to consolidate old 401(k)s into a single IRA – it simplifies the RMD process and gives you flexibility in where to take the distribution from.
The Key Takeaways
If you’ve missed an RMD, don’t panic – take corrective action. File Form 5329, attach a reasonable cause letter, take the missed distribution, and the penalty can often be waived entirely. The IRS isn’t trying to ruin your retirement – they want you to comply, and they generally cooperate with retirees who take corrective steps.
If you’re approaching RMD age, plan the first one carefully. Delaying into the following year sounds attractive but can trigger higher tax brackets, more taxable Social Security, and higher Medicare premiums two years out. Unless analysis specifically supports delaying, take your RMD in the year it’s required.
If you have old 401(k)s from previous employers, know where they are. They’re subject to RMDs once you reach the required age, regardless of whether you’re still working at a different employer.
If you’re charitably inclined, consider Qualified Charitable Distributions. They satisfy your RMD requirement while keeping the income off your tax return – often a more efficient way to give than writing checks.
If you have multiple 401(k)s, consider consolidating into an IRA. It simplifies RMD compliance and gives you flexibility for the future.
The Bottom Line
The rules have nuances, and the mistakes have real costs. Missing one is fixable. Delaying one without thinking through the implications can cost you more than the original tax savings you were trying to achieve.
The retirees who succeed are the ones who plan ahead, know the rules, and work with professionals to avoid the hidden costs that the IRS doesn’t put on the front of the form.
If you’re approaching RMD age and want help planning your distributions to minimize tax, IRMAA, and Social Security taxation impacts, we can help. At Hyperion Financial, we model the full picture of your retirement income – including how RMDs interact with everything else – so you don’t get caught by the hidden costs. Click here to have a conversation.