Fines are a multibillion-dollar business for the IRS.
Granddaughter buys back grandma’s house with touching surprise
“Are you kidding me?!” A car trip in Illinois became unforgettable when my granddaughter told her grandmother a story about buying her old house back.
Retirement accounts like 401(k)s and traditional IRAs allow you to deduct contributions from your taxable income, but they don’t completely avoid taxes. When you make withdrawals in retirement, you are responsible for paying them on the back end.
To prevent people from not making withdrawals and avoiding paying taxes, the IRS introduced Required Minimum Distributions (RMDs). For Americans born between 1951 and 1959, RMDs begin in the year you turn 73. The RMD age limit for people born after 1960 has been increased to 75 years.
For the first year, you must take your RMD by April 1 of the following year. If you turn 73 this year, you have until April 1, 2027 to take your RMD. For biennials, you must take your RMD by December 31st (even if you delay your first RMD until April).
There is a reason why minimum distributions are “required” and you may be penalized without realizing it. Here’s how to get around it:
How to calculate RMD
One of the first mistakes people make is not knowing how much to withdraw. Here are three steps to calculate the numbers:
- Check your account balance at the end of the previous year. For this year, the balance will be as of December 31, 2025.
- Look for the life expectancy factor (LEF) that matches your age and marital status (these are provided by the IRS).
- Divide your account balance by your LEF.
For LEF, if you are single, married to someone within 10 years of age, or married to someone who is not the sole beneficiary of your IRA, use the Uniform Life Table. Everyone else uses the joint lifespan and final survivor expectation tables.
Consider someone who has $1 million in a retirement account at the end of 2025 and uses the Uniform Lifetime table. RMDs for ages 73 to 80 are:
Table by author. RMDs are rounded to the nearest dollar.
Most major platforms also offer RMDs, but they do not automatically transfer funds. Regardless, you are responsible for it. Some people take their full RMD at the beginning of the year and make do with it, while others treat it like a paycheck and “pay it themselves” monthly, quarterly, or whatever works best for them.
The easiest way to avoid missing out on RMDs is to take the money in a lump sum and call it a day, but some people prefer to leave the money invested and let it grow (though it can also decline).
Losing your RMD is not an easy mistake
If you do not receive an RMD, you will be subject to a penalty of 25% of the amount not withdrawn. For example, if you were supposed to withdraw $40,000 and could only withdraw $10,000, the penalty would be $7,500 (25% of $30,000).
If you receive a qualifying RMD within two years of the due date, the penalty can be reduced to 10% of the amount not withdrawn. In this case, the fee will be reduced to $3,000.
RMD fines are big business for the IRS. They cost people a total of $1.7 billion annually, according to Vanguard research. The company also said 7% of people with Vanguard IRAs missed their RMDs in 2024 and paid an average penalty of more than $1,100.
Accidents happen, and some are more costly than others.
401(k) and IRA RMDs are treated differently
If you have multiple 401(k)s (this is common for people who change jobs throughout their careers), you’ll need to take separate RMDs from each account. You cannot combine totals and receive RMDs from either account. Even if you withdraw more than expected from one 401(k) and not the other, you will be charged a penalty.
On the other hand, if you have multiple traditional IRAs, you can combine them all to calculate your RMDs and get your total RMDs from a single account.
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