RMDs Are Due December 31. What Happens If I Don't Take a Distribution?

In almost all cases the IRS enforces its rules through fines and penalties. This is the case of Required Minimum Distributions (RMDs).

As always, your RMDs are due by the end of the year. In this year, if you don’t take out the minimum distributions by December 31, 2024, the IRS will penalize you with a special excise tax. This tax is worth 25% of the amount not withdrawn, reduced to 10% if you correct the error within two years. This penalty can also be waived on appeal if you can demonstrate that your shortfall was based on good-faith error and that you are taking steps to correct it. And if it’s your first RMD, you may have some wiggle room until April.

Here are some things to think about. And if you need help building a strategy for your RMDs, you can use this free tool to match with up to three fiduciary financial advisors..

What Are Required Minimum Distributions?

A required minimum distribution (RMD) is a tax rule that applies to pre-tax retirement accounts like a 401(k) or a traditional IRA. It does not apply to post-tax accounts like a Roth IRA or a Roth 401(k). Under this rule, every year you must withdraw a minimum amount from each qualifying retirement account that you own. The exact amount is based on the total value of the account at the end of the previous year and an age-based figure called your life expectancy factor.

For example, say that you are a single individual looking to determine your RMD for 2024. You had $1 million in your 401(k) at the end of 2023. Per IRS Publication 590, your life expectancy factor is 24.6, so your RMD would be:

$1 million / 24.6 = $40,650

In this example, you must withdraw at least $40,650 from your 401(k) by the end of 2024.

Note that an RMD is not a tax in and of itself. This is simply the minimum amount you must withdraw from your retirement account. However, this withdrawal does trigger a tax event, leading you to typically pay income taxes on your distributions. This is the purpose of an RMD. Since these are pre-tax portfolios, the IRS wants to prevent you from leaving the money on deposit and untaxed indefinitely. This is why RMD rules do not apply to post-tax Roth accounts. Since you’ve already paid taxes on these portfolios, the IRS has no further interest in the money.

Required minimum distributions apply to each category of pre-tax account you own. This means that if you hold a 401(k) and an IRA, for example, you would need to calculate your minimum distributions for each independently. Taking an excess distribution from one will not reduce your obligations to the other. However, if you own multiple IRA accounts, you can satisfy the collected RMD requirements of all of these together accounts with a single withdrawal from one IRA.

A financial advisor can help you build an effective tax strategy for your retirement income.

When Must You Take Required Minimum Distributions?

Required minimum distributions begin at age 73, with a little wiggle room for your first withdrawal. Your first minimum distribution must be taken by April 1 of the year after you turn 73. So, for example, say that you turned 73 in 2024. Your first minimum distribution must be taken by April 1, 2025. This age will steadily increase in the coming years, with minimum distribution requirements beginning at age 75 in 2033.

Before you turn 73, RMD rules do not apply.

All RMDs after your first one must be taken by December 31 of any given year. You have until midnight on the 31st to take your distribution, although in practice this may vary based on how and when your brokerage can execute a withdrawal order. If you take a withdrawal after business hours or on a holiday, it is possible that your brokerage may not process the order until after the deadline, so be careful about waiting until the lost minute.

If you take your minimum distribution on the 31^st, you calculate the following year’s minimum distribution based on your account balance after a qualifying withdrawal. So, for example, say that you are 75 in 2024. You would take your minimum distribution by December 31, 2024. Then, you would calculate your RMD for 2025 based on the account balance as of January 1, 2025.

You can take your minimum distributions at any time and in any amount over the course of the year. This can mean anything from taking steady income-based distributions to withdrawing it all in one lump sum at the end of the year. Once you turn 73, you must continue to take minimum distributions for the remainder of your life or until the account is exhausted.

While beyond the scope of this article, these rules are different for inherited retirement accounts. If you inherit a retirement account from a third party, you have a different set of RMD requirements. See our article on the subject for the full requirements in this case, or consider speaking with a financial advisor who can help you navigate the rules.

Penalties for Missing Minimum Distributions

If you do not take your entire minimum distribution by the end of the year, the IRS penalizes you with an additional tax known as an “excise tax.” This tax penalty comes to 25% of the amount you did not withdraw and is applied in the following year. So if you do not take your full minimum distribution for 2024, this excise tax will be applied to your tax bill due April 15, 2025.

If you correct this error within two years, by withdrawing the required amount, this penalty can be reduced to 10% of the amount not withdrawn. This excise tax was reduced in 2022 from its previous 50% rate.

If you correct the withdrawal, you can notify the IRS and appeal your penalty fee by filing form 5329. On this form you can also appeal the penalty altogether. If you demonstrate that your under-withdrawal was due to good faith and/or reasonable error, and that you are taking steps to remedy the shortfall, the IRS can waive these penalties altogether. However, this waiver is discretionary. Among other situations, the IRS typically will not waive penalties for repeat errors or in situations where it appears that you simply ignored your obligations.

For example, say that you have a $50,000 minimum distribution in 2024. You only take out $20,000 by December 31, leaving a $30,000 shortfall. In 2025 you would owe a tax penalty of:

Shortfall * 25% = $30,000 * 25% = $7,500

If you correct the error by December 31, 2026 (two years from the original deadline) you can file form 5329 and get this tax reduced to $3,000 (10% of the shortfall). If you have already paid your excise tax, the IRS will refund you for the amount of the reduction. Consider speaking with a financial advisor if you need help with your RMDs and taxes.

Managing RMDs

There are few universally effective ways to reduce or eliminate your minimum distributions. If you are in or near retirement age and hold a pre-tax account, for most households the most financially effective option will typically be to take a minimum distribution and pay the associated income taxes.

This is because managing the money in your pre-tax portfolio will require withdrawing it, which will in turn trigger the same income taxes you are trying to avoid. That doesn’t mean there are no options, just that they are situationally useful.

The most common way to manage an RMD is through a Roth conversion. With this approach, you move your money from a qualifying pre-tax portfolio to a Roth IRA. The advantage is that money in a Roth IRA will grow entirely tax-free. You will not pay taxes when you withdraw it in retirement, and you will not have minimum distributions. The disadvantage to this approach is that you must pay income taxes on the entire amount converted in the year that you move it. Households typically will convert a large portfolio in annual, staggered amounts to reduce this tax impact.

If you make a Roth conversion earlier in life, this can be an extremely effective way to manage taxes and RMDs in retirement by eliminating them completely. For younger households that can afford it, typically it is prudent at least discuss the pros and cons of a Roth conversion with your financial advisor.

However if you are in or nearing retirement, the lump-sum costs of paying your taxes all at once will typically dwarf the tax benefits of eliminating RMDs. A Roth conversion can still be very effective if your primary goal is to preserve this portfolio for estate planning or similar purposes, but it may cost more money than it will save.

You can also manage RMDs by purchasing what is called a Qualified Longevity Annuity Contract (QLAC). Like all annuities, this is a contract that you purchase for either a lump sum amount or a series of payments over time, typically from an insurance or financial company. In exchange for this payment the company promises you a series of defined, structured payments over a set period of time.

A QLAC is a form of lifetime annuity, meaning that once payments begin you receive them for the rest of your life. Individuals can use up to $200,000 from a pre-tax retirement account to purchase a QLAC. This amount will increase in future years based on inflation.

A QLAC can help you manage RMDs by setting your payment date. Like a typical annuity, you do not have a minimum distribution based on the money invested in the annuity. Instead, your RMD is considered satisfied by the annuity’s payments and the resulting taxes that you pay. With a QLAC, you can defer payments until age 85, allowing this account to continue growing tax-free for more than a decade after other pre-tax portfolios must begin distributing assets. While this does not eliminate your RMDs, it does allow your money to stay in place for more than a decade.

The Bottom Line

A required minimum distribution (RMD) is the amount you must take from pre-tax retirement portfolios each year. If you do not take out your withdrawal by December 31, you will owe up to a 25% excise tax on the amount you do not withdraw.

Tips On Managing Your Retirement Taxes

Managing your taxes in retirement is a critical issue. One good place to start is by looking at these states which don’t tax retirement income.
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