Retirees who turned 73 in 2025 or later face a steep federal penalty if they fail to pull money from traditional IRAs and workplace retirement plans on time. The IRS imposes a 25% excise tax on any shortfall between what an account holder was required to withdraw and what was actually taken. That tax drops to 10% only if the mistake is corrected within two years, but the burden of getting it right falls entirely on the individual, not the plan administrator or financial institution.
Why the Age-73 RMD Trigger Carries Real Financial Risk
The SECURE 2.0 Act, enacted as Division T of Public Law 117-328, raised the required beginning age for minimum distributions from 72 to 73. That shift gave some savers an extra year of tax-deferred growth, but it also created confusion about exactly when the clock starts. IRS Publication 575 defines the starting year as “the year in which you reach age 73 or retire,” depending on the plan type and required-beginning-date rules.
The penalty for missing a distribution is not a flat fee. Under 26 U.S. Code Section 4974, the excise tax equals 25% of the undistributed required amount. For someone with a $500,000 IRA balance and a life-expectancy divisor that produces a roughly $20,000 annual RMD, skipping the withdrawal entirely would generate a tax bill of about $5,000 on top of any regular income tax owed once the money is eventually taken out.
The IRS does offer a safety valve. If a taxpayer corrects the shortfall within two years, the penalty rate falls to 10%. But that correction requires filing Form 5329 and, in many cases, requesting a waiver by attaching a letter of explanation. The agency’s own FAQ page states plainly that the account owner is ultimately responsible for calculating and taking the correct RMD each year.
How the IRS Calculates What You Owe
The math behind an RMD is straightforward in theory but easy to botch in practice. The IRS instructs account holders to divide their total account balance as of the prior December 31 by a life-expectancy factor drawn from IRS actuarial tables. Those tables were updated through final regulations published in Internal Revenue Bulletin 2024-33, which consolidated and clarified rules under Section 401(a)(9) of the tax code.
Complications arise when retirees hold multiple IRAs or inherit accounts with separate distribution schedules. Each traditional IRA has its own RMD calculation, though the total can be withdrawn from any one or combination of those accounts. Employer-sponsored plans like 401(k)s do not share that flexibility; each plan’s RMD must come from that specific plan. Mixing up these rules is one of the most common ways people end up with a shortfall and a 25% excise tax on the undistributed amount.
The IRS also distinguishes between original account owners and beneficiaries. Inherited IRAs may be subject to a 10-year payout rule, annual life-expectancy distributions, or both, depending on when the original owner died and the beneficiary’s status. Failing to coordinate inherited-account requirements with your own age-73 obligation can result in multiple missed distributions in the same year, compounding the penalty exposure.
Key Deadlines and the “First RMD” Trap
For most retirees, the first RMD must be taken by April 1 of the year after turning 73. All subsequent RMDs are due by December 31 of each year. That April 1 grace period creates a timing trap: delaying the first withdrawal means you will owe two RMDs in the same calendar year-the delayed first-year amount and the second-year amount-potentially pushing you into a higher tax bracket.
Workers who are still employed at 73 may be able to delay RMDs from their current employer’s plan if the plan allows a “still working” exception and they do not own more than 5% of the company. However, this exception generally does not apply to IRAs or to plans from former employers. Misunderstanding which accounts qualify can lead to skipping a required payout and triggering the excise tax.
Practical Steps to Avoid the 25% Excise Tax
Because the responsibility rests with the individual, retirees need a clear process to avoid mistakes. Start by listing every account subject to RMDs, including traditional IRAs, SEP and SIMPLE IRAs, and former-employer 401(k) or 403(b) plans. Confirm which accounts can be aggregated for distribution purposes and which must stand alone.
Next, verify your required beginning date and calculate the RMD for each account using the correct life-expectancy table. Many custodians provide an estimate, but the IRS emphasizes on its RMD guidance page that taxpayers remain responsible for ensuring the numbers are accurate. Setting distributions to automatic-monthly, quarterly, or annually-can reduce the risk of overlooking a payment.
If you discover a missed or underpaid RMD, act quickly. Take the shortfall as soon as possible, then complete Form 5329 for each affected year. Attach a concise letter explaining the error, the steps you took to correct it, and any mitigating circumstances such as illness, administrative delays, or confusion over new rules. While the law specifies a 25% tax (reduced to 10% for timely corrections), the IRS has discretion to waive all or part of the penalty when the shortfall is due to reasonable error and the taxpayer has made reasonable efforts to comply.
Finally, revisit your withdrawal strategy annually. Changes in account balances, beneficiary status, or employment can all alter your RMD obligations. By treating the age-73 trigger as a recurring planning checkpoint rather than a one-time event, retirees can preserve more of their savings and avoid handing an unnecessary share to the Treasury in excise taxes.
