What’s the Worst That Could Happen If You Don’t Take Your RMD?

If you don’t withdraw your required minimum distribution (RMD) amount each year by April 1 after you turn 73, you could face a stiff tax penalty from the IRS. 

“Failing to take an RMD can result in the IRS imposing a 25% excise tax (penalty) on the amount that should have been taken and was not taken,” says Christopher Jervis, an Enrolled Agent with over two decades of experience in tax planning, preparation, and representation. “Failure to take a required minimum distribution may seem like a minor issue, but it can quickly become a problem, particularly for taxpayers on fixed incomes.”

RMD amounts must be withdrawn annually from certain employer-sponsored retirement plans, like 401(k)s, and personal accounts, such as IRAs. It’s up to you to calculate and take the correct amount each year by the required deadline—unless it’s your first RMD year, in which case you can delay it until April 1 of the following year.

What to Do If You Missed Your RMD

If you haven’t taken your RMD, you may be able to reduce the penalty if you act quickly to correct it.

“If the penalty is assessed, the taxpayer can get the penalty reduced to 10% if they correct the RMD within two years,” says Jervis. “They can file a Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with the tax return to request the reduced penalty.”

Jervis also advises that in some situations, the IRS may even waive the penalty entirely, provided you can show that the mistake was due to a reasonable error and that you’ve taken steps to correct it.

The Ripple Effect of Missing Your RMD

The initial 25% tax penalty is one thing, but the knock-on effects of missing your RMD can impact your finances immensely.

“A 25% tax penalty significantly impacts any returns being generated, and can potentially wipe out any interest or dividends generated in an account,” Jarvis warns. “Also, the penalty means more money needs to be paid, which may require taking more distribution than is required, which increases the tax bill, which requires more money….it becomes a spiral of taking more and more money out, potentially depleting the account much faster.”

Jervis recommends having a qualified financial advisor or credentialed tax professional (CPA, Enrolled Agent, attorney, or AFSP practitioner) monitor when RMDs are due and for how much.

Many investment firms and IRA custodians send letters advising clients of their upcoming RMD requirements, but it’s also a good idea to set your own reminders well in advance. Some account custodians will include calculations in their RMD notification, but others will only state that an RMD is due and only calculate the amount upon request.

Which Requirement Accounts Require RMDs?

Any retirement plan sponsored by an employer, including profit-sharing arrangements, is subject to RMDs: 401(k) plans, 403(b) plans, and 457(b) plans.

Traditional IRAs and plans based on IRAs, like SEPs, SARSEPs, and SIMPLE IRAs, are also subject to RMDs.

The Bottom Line

The penalty for not taking your RMD is severe, so it’s worth making sure you’re organized to meet this important annual deadline. If you haven’t taken your RMD, take the necessary steps to follow up as soon as possible to avoid compounding the issue. Filing the proper forms and showing corrective steps could help reduce or eliminate the penalty.