Your Required Minimum Distribution Is Due - What Happens If You Take Too Little?

(MENAFN- Free Financial Advisor) Required minimum distributions must meet IRS deadlines, and withdrawing too little can trigger an excise tax of 25% on the shortfall. Correcting the mistake within the applicable window may reduce the rate to 10%, while qualifying circumstances may justify a waiver – Shutterstock

Retirement accounts come with plenty of rules, but few have such an awkward consequence as failing to withdraw money you actually own. Required minimum distributions (RMDs) force retirees to take money out of certain retirement accounts, whether they need the cash or not. Take less than the required amount, and the IRS may charge a penalty on the difference.

That last detail deserves a closer explanation. The penalty doesn't automatically apply to your entire retirement account, and the IRS does offer ways to reduce or eliminate it in qualifying circumstances. A missed withdrawal can become an expensive mistake, but it doesn't necessarily have to stay one.

The IRS Doesn't Give Credit for Good Intentions

Once you reach the applicable starting age, the IRS expects annual withdrawals from certain tax-deferred retirement accounts. For most people born between 1951 and 1959, that age is 73. People born in 1960 or later generally start at 75 under current law. The rules cover traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans such as 401(k)s and 403(b)s. Original owners of Roth IRAs don't have lifetime RMD requirements. Designated Roth accounts in workplace plans also no longer require lifetime RMDs beginning in 2024.

Your annual withdrawal generally depends on your account balance from December 31 of the previous year and an IRS life expectancy factor. The IRS publishes tables that help calculate the amount. Your age, account balance, and certain beneficiary arrangements can affect the calculation.

For example, suppose your required distribution comes to $12,000, but you withdraw only $9,000 during the year. The $3,000 shortfall creates the potential tax penalty. The IRS doesn't care that you intended to withdraw the rest after the holidays or simply forgot to schedule the transfer.

The Penalty Can Reach 25% of the Shortfall

The standard excise tax for failing to take a full RMD is 25% of the amount you should have withdrawn but didn't. In the example above, a $3,000 shortfall could produce a $750 tax penalty. That's an unpleasant bill for overlooking a relatively small transaction. Fortunately, the penalty can drop to 10% if you correct the mistake within the IRS correction window and meet the applicable filing requirements.

Using the same example, correcting the $3,000 shortfall could reduce the penalty to $300. The correction window generally ends on the last day of the second tax year following the year the additional tax applies. However, an IRS deficiency notice or tax assessment can close that window sooner.

The reduced rate isn't automatic simply because you eventually take the money. You must withdraw the missing amount and report the additional tax correctly. IRS Form 5329 handles the reporting.

Missing the Deadline Doesn't Mean You Should Give Up

One of the worst reactions to a missed RMD is doing nothing because the deadline has already passed. That approach can turn a correctable mistake into a more expensive headache. If you discover a shortfall, contact your retirement account custodian and arrange to withdraw the missing amount as soon as practical. Check the account's transaction history, too. A distribution may have occurred without appearing where you expected it.

Next, determine how much you actually missed. If your required distribution was $12,000 and you already withdrew $9,000, you generally need another $3,000 to correct that year's shortfall. Keep documentation showing the original distribution requirement, the amount withdrawn, and the corrective transaction. You'll need accurate figures when preparing Form 5329. A tax professional can help determine the appropriate filing treatment, especially if multiple retirement accounts complicate the calculation.

Don't assume an extra withdrawal next year will solve last year's problem. The IRS doesn't let you carry excess distributions forward to satisfy future RMDs. Each tax year has its own withdrawal requirement.

The IRS May Waive the Penalty

Here is a provision worth knowing before panic sets in: The IRS can waive some or all of the excise tax if a reasonable error caused the shortfall and you take reasonable steps to correct it. Consider a retiree whose financial institution transferred an IRA incorrectly, leaving part of the required withdrawal unfinished. Another person might have misunderstood the distribution deadline after changing account providers. These situations don't guarantee relief, but they may support a waiver request.

To request relief, file Form 5329 and attach a written explanation. Describe what caused the missed distribution, explain the corrective steps, and provide relevant details supporting the request. Follow the form instructions for reporting the amount you want waived.

The IRS reviews the explanation and decides whether the circumstances justify relief. Simply forgetting the deadline doesn't automatically qualify, and the agency doesn't promise approval.

Still, requesting a waiver can make sense when circumstances genuinely explain the mistake. Ignoring the filing requirement because you expect the IRS to forgive it would be a rather different strategy.

Two RMD Deadlines Can Create a Tax Surprise

First-time RMD recipients face another calendar complication. You generally can delay your first distribution until April 1 of the year following the year you reach your applicable starting age. That flexibility sounds attractive, particularly if you don't need the money immediately. However, your second RMD remains due by December 31 of that same year.

Consequently, delaying the first withdrawal can put two RMDs into one calendar year. Both distributions generally count as taxable income, potentially pushing your income higher than expected.

For example, someone who turns 73 in 2026 could postpone the first RMD until April 1, 2027. However, that person must also take the 2027 RMD by December 31, 2027. The combined withdrawals could create a larger tax bill than taking the first distribution during 2026.

There's another detail worth remembering: An RMD generally cannot go into another retirement account through a rollover. You must actually distribute the required money from the retirement account. You may not need to spend it, but moving it into another IRA doesn't satisfy the requirement.

Check the Accounts Before December Gets Busy

RMD mistakes often happen because retirees assume their financial institution handles everything automatically. Some custodians calculate and distribute RMDs, while others expect account owners to arrange withdrawals.

Multiple accounts create another opportunity for confusion. You can generally combine RMD amounts from traditional IRAs and withdraw the total from one or more of those IRAs. However, workplace retirement plans generally have separate distribution requirements. You can't automatically use an IRA withdrawal to satisfy a 401(k) RMD.

Also, remember that RMD calculations use previous year-end balances, not whatever your account happens to contain today. Market movements during the current year don't change the original calculation.

Check your required amount, confirm which accounts need distributions, and allow enough time for processing. A transaction that sits in a pending queue until January won't satisfy a December 31 deadline.

A Missed Withdrawal Is Fixable, But Ignoring It Isn't

An RMD shortfall can trigger a painful tax penalty, but the IRS provides correction options and potential relief. Acting promptly gives you more opportunities to reduce the financial damage.

Review your retirement statements, verify your annual withdrawal requirements, and investigate any missing distributions before filing your tax return. If you discover an error, correct it and address Form 5329 rather than hoping the IRS overlooks the missing money.

Retirement planning already involves enough decisions about spending, saving, and taxes. A forgotten withdrawal shouldn't become an annual tradition.

Have you ever encountered a confusing RMD deadline or unexpected retirement account rule? What caught you off guard?

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