If you’re retired, you probably spend less time thinking about the return on your money and more thinking about the return of your money. You watch your spending, monitor your investments, and try to minimize your taxes.
But there’s one specific oversight that can cost you more than a bad stock pick or an unexpected medical bill. It’s called a required minimum distribution (RMD), and failing to take it is one of the most expensive mistakes a senior can make.
Every year, thousands of retirees simply forget to withdraw the mandatory amount from their retirement accounts. The result? The IRS hits them with a penalty that’s far steeper than almost any other tax fine.
What is an RMD?
The government allows you to save money in your traditional 401(k) or traditional IRA tax-deferred. For decades, you can let that money grow without touching it. But eventually, Uncle Sam wants his cut.
RMDs are the government’s way of saying, “Time’s up.” Once you reach a certain age, you’re legally required to start withdrawing a specific portion of your account each year so the IRS can finally tax it.
The penalty
In the past, the penalty for missing an RMD was a staggering 50% of the amount you failed to withdraw. While the SECURE 2.0 Act reduced this, it’s still massive. As of 2025, if you fail to take your full RMD by the deadline, the IRS imposes an excise tax of 25% on the amount you failed to withdraw.
The math: Imagine your RMD for the year was $20,000, but you forgot to take it.
- The penalty: You now owe the IRS $5,000 instantly.
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The taxes: You still have to withdraw that $20,000 and pay regular income tax on it.
That means a single moment of forgetfulness could wipe out a significant chunk of your savings. (Note: If you catch the mistake quickly—usually within two years—and file a correction, the penalty can be reduced to 10%, but you still have to navigate the paperwork headache to get there.)
Who is affected?
The rules for when you must start withdrawing RMDs have shifted recently, creating confusion. Here’s the simple breakdown for right now, according to IRS guidelines:
- If you turned 74 or older in 2025: You must take an RMD by Dec. 31 of this year and every year going forward.
- If you turned 73 in 2025: You have a one-time grace period until April 1, 2026, to take your first withdrawal. (But be careful—if you wait until April, you’ll have to take two distributions in 2026, which could push you into a higher tax bracket).
A warning on inherited IRAs: If you inherited an IRA from a parent or spouse, the rules are even trickier. Many beneficiaries are now subject to a 10-year rule that requires them to drain the account within a decade. If you ignore an inherited account, you’re subject to the same 25% penalty.
The exception
There is an exception to these rules: If you are still working at age 73, you can usually delay taking RMDs from your current employer’s 401(k) until you actually retire.
However, this exception does NOT apply if:
- You are self-employed: If you own more than 5% of the company sponsoring the plan — which includes solo 401(k)s — you cannot delay.You must start taking RMDs when you turn 73, even if you’re working 60 hours a week.
- You have an IRA: This exception never applies to traditional IRAs, SEP IRAs or SIMPLE IRAs. You must take RMDs from these accounts starting at 73, regardless of your employment status.
You don’t pick the amount you withdraw; the IRS picks it for you. The formula is based on your account balance on Dec. 31 of the previous year divided by a “life expectancy factor.”
Most retirees use the IRS’ Uniform Lifetime Table. (There are different tables for the beneficiaries of single taxpayers, and for owners with spouses more than 10 years younger who are the sole beneficiaries of their IRAs.)
Example: If you’re 75 years old, your IRS factor is 24.6. If your IRA balance was $500,000 on Dec 31 of last year, you divide $500,000 by 24.6. Your RMD: $20,325.
The fix: Make it automatic
The best way to avoid the RMD penalty is to remove human error entirely. Almost every major brokerage firm—including Fidelity, Vanguard and Schwab—offers a free automatic RMD service.
How to set it up:
- Search for “Automatic Withdrawal Plan” or “RMD Service.”
- Select “Calculate RMD for me.”
By choosing this option, the brokerage will automatically calculate the correct amount based on the new IRS tables each January and deposit the cash into your checking account on the date you choose.
How to avoid the taxable income and the penalty
If you don’t actually need the money to live on, taking an RMD is painful because it raises your taxable income.
One solution is a qualified charitable distribution (QCD). If you’re over 70½, you can instruct your IRA custodian to send your RMD money directly to a charity.
The benefit: The transfer counts toward your RMD, but it never counts as taxable income. You can satisfy your RMD requirement without raising your tax bill by a single cent.
The bottom line
Retirement is expensive enough without donating 25% of your savings to the IRS in penalties.
If you’re over 73, check your accounts today. If you haven’t taken your required withdrawal for 2025 yet, you have until Dec. 31 to avoid one of the most expensive mistakes a retiree can make.
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