The High Cost of Missing RMD Deadlines

Failing to take your Required Minimum Distributions (RMDs) on time comes with some of the stiffest penalties in the tax code. The IRS considers this such a serious matter that it imposes an astounding 50% penalty on any amount not withdrawn—its highest penalty rate.

But before we dive into the details of this penalty, let’s start with some basics about RMDs – Required Minimum Distributions:

What Is an RMD?

An RMD is the minimum amount you must withdraw from your retirement accounts each year once you reach age 73. Thanks to the Secure Act 2.0, the age has gradually increased from 70½ to 73, and will eventually reach 75.

You’ve enjoyed tax breaks by contributing to these accounts, but as Ed Slott, America’s IRA expert, says, “We put money in 401ks and IRAs and we made that deal with the devil, the government, saying, all right, we’ll get a little tax break up front each year. But then, as with any deal with the devil, there’s a day of reckoning.”

How RMDs Are Calculated

The IRS uses a formula based on:

• Your account balance as of December 31st of the previous year
• Your life expectancy according to IRS tables
• Your age

The percentage you must withdraw increases each year as you age. This means your required distribution could grow substantially over time, even if your account value stays the same.

Now that we understand the basics, let’s return to the penalties associated with not taking the right amount of RMDs on time.

Understanding the 50% Penalty

Let’s look at a real example we frequently encounter at B.O.S.S. Retirement Solutions:

If your RMD for the year is $20,000 and you don’t take it, here’s what happens:

• 50% penalty on the $20,000 distribution you didn’t take: $10,000
• Since you still have to pay taxes on the amount you should have withdrawn – regular income taxes due on the $20,000 the government says you should have taken out of your retirement accounts: approximately $4,400 (assuming 22% tax bracket)
• Combined cost: $14,400
• Plus potential state taxes
• Leaving you just $5,600 of the $20,000

Deadline Requirements

For your first RMD at age 73, you have until April 1st of the following year to take the distribution. However, this creates another potential trap:

Example:

• Turn 73 in 2025
• Wait until March 2026 to take 2024 RMD
• You must also take 2026’s RMD by December 31, 2026
• Result: Two RMDs in one tax year, potentially pushing you into a higher tax bracket

Aggregating RMDs

Many retirees don’t realize they can aggregate RMDs from similar types of accounts. For traditional IRAs, you can take the total RMD amount from any combination of your IRA accounts. However, 401(k) RMDs must be taken separately from each account.

This flexibility with IRAs can help you:

• Choose which investments to sell
• Manage tax implications
• Maintain preferred asset allocation

How to Fix a Missed RMD

If you miss an RMD, you may be able to avoid penalties by:

1. Taking the missed distribution immediately
2. Filing Form 5329
3. Attaching a letter explaining the reasonable cause for the delay
4. Documenting steps taken to remedy the situation

How the Government Tracks Your RMDs

The IRS closely monitors RMD compliance through:

• Form 5498 (sent by your custodian)
• Form 1099-R (reports distributions)
• Electronic reporting from financial institutions
• Cross-referencing with your tax return

Taxation of RMDs

Every dollar of your RMD is taxed as ordinary income. As Ryan Thacker points out, “Your IRA is really an IOU to Uncle Sam.” A recent B.O.S.S. Retirement Solutions client discovered this the hard way:

• Had $660,853 in their 401(k)
• Total tax bill through age 90: $941,334
• More in taxes than the original account value

The Devastating Impact of Market Downturns

Here’s where RMDs can really hurt you. As Tyson Thacker explains: “If the portfolio is down, then you have this problem where you’re withdrawing money while the portfolio is down. And as a result, you have a lot less money as the market climbs back up because you’ve been taking money out of the bucket at the same time that there’s less money in the bucket anyway.”

Consider this example from B.O.S.S. Retirement Solutions:

• You have $1 million in your account
• Market drops 40% ($400,000 loss)
• Account value now $600,000
• Still must take your RMD
• May be forced to sell investments at a loss

Penalty Prevention Is Key

The B.O.S.S. Retirement Solutions team recommends these preventive steps:

• Set up automatic distributions
• Schedule annual reviews
• Work with a qualified advisor
• Keep track of all retirement accounts
• Document RMD calculations

Planning Ahead to Minimize RMD Impact

B.O.S.S. Retirement Solutions recommends several strategies:

• Consider Roth conversions before RMDs begin
• Coordinate RMDs with other income sources
• Plan for tax implications years in advance
• Review beneficiary designations
• Create a systematic withdrawal strategy

Don’t Navigate RMDs Alone

RMDs are complex, and mistakes can be incredibly costly. The good news? You don’t have to figure this out by yourself. B.O.S.S. Retirement Solutions offers a free RMD analysis to help you:

• Calculate your required distributions
• Develop a tax-efficient withdrawal strategy
• Coordinate RMDs with your overall retirement plan
• Avoid costly penalties
• Maximize your retirement savings

Call B.O.S.S. Retirement Solutions at 800-637-1031 today or click here to get your free customized RMD analysis. If you’ve saved at least $200,000 for retirement, their team can help ensure you never miss a distribution and make the most of your hard-earned savings. Don’t let Uncle Sam’s “weapon of mass destruction” devastate your retirement. Click here now to schedule your free analysis.