The $3,000 Retirement Mistake Millions Make Each Year (And How to Avoid It)

If you're lucky enough to retire with an IRA, pension, or other savings set aside, you'll have to contend with required minimum distributions or RMDs.

RMDs are the minimum amounts that retirees must withdraw each year. The rules sound straightforward enough. Yet every year, thousands of well-meaning retirees miss a required withdrawal, which incurs a hefty tax penalty.

If you failed to withdraw a $12,000 RMD, the 25% penalty could cost you $3,000 in excise taxes alone. And that's on top of the income tax you still owe on distributions.

This frustrating mistake is nearly always avoidable, as it usually stems from a simple misunderstanding of the rules.

If you want to avoid wasting money in retirement, it's important to understand how RMDs work and how required distributions are calculated.

Below, we break down why RMDs are easy to miss, how penalties work, and what retirees can do to make sure it never happens to them.

What required minimum distributions actually are

RMDs are the minimum amounts that the IRS requires you to withdraw each year from certain types of retirement accounts once you reach a specific age.

Generally, you must begin taking RMDs from traditional IRAs and employer-sponsored retirement plans when you reach age 73.

Roth IRAs do not require distributions while the original owner is alive, but beneficiaries of Roth accounts are still subject to post-death distribution rules, which may include annual RMDs or full withdrawal within 10 years, depending on eligibility.

Which retirement accounts trigger RMDs

The RMD rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most workplace retirement plans, including 401(k), 403(b), 457(b), TSPs, pensions, and profit-sharing plans.

Many retirees choose to roll pre-tax retirement account funds into Roth accounts, which exempts funds from RMDs. However, the amount you convert is generally taxable in the year of the rollover.

Why retirees often miss RMD deadlines

Retirees don't generally miss RMDs because of carelessness. They miss them because the rules are layered.

The first RMD has a different deadline from future withdrawals. Moreover, some workplace plans allow retirement delays, and each account has its own calculation.

Ultimately, the IRS holds the account owner, not the custodian, responsible for taking the correct amount on time.

The first RMD deadline trips people up

You're required to take your first Required Minimum Distribution (RMD) for the year you turn 73. However, you have the option to postpone that initial withdrawal until April 1 of the following year.

After the first RMD, all future distributions must be withdrawn by December 31 each year. Keep in mind that if you delay your first RMD until the following year, you'll still need to take that year's RMD by December 31, meaning you could end up taking two distributions in the same tax year, potentially increasing your taxable income.

How RMD amounts are calculated

Each year's RMD is calculated by dividing the prior year's December 31 account balance by a life expectancy factor published by the IRS.

Most retirees use the Uniform Lifetime Table, though different tables apply if your spouse is more than 10 years younger or if you're the beneficiary of an inherited IRA account.

What happens if you miss an RMD

Failing to withdraw the full required amount by the deadline can trigger an excise tax equal to 25% of the amount not withdrawn.

If the mistake is corrected within two years, the penalty may be reduced to 10%. The tax is reported on IRS Form 5329.

When penalties can be waived

The IRS allows penalties to be waived if the account owner can show the failure was due to a reasonable error and that reasonable steps are being taken to fix it.

This requires filing Form 5329 and attaching a written explanation describing what went wrong and how it was corrected.

Leveraging RMDs as a vehicle to transfer wealth

For some retirees, RMDs are a savvy way to transfer wealth. The IRS allows individuals to give a cash gift, up to $38,000 for married couples or $19,000 per individual, without incurring the federal gift tax. These amounts reflect 2026 caps, and the amounts are adjusted annually.

You'll still owe income tax on the RMD itself, but withdrawing enough to meet your RMD requirement means you'll avoid the 25% excise tax, while gifting money tax-free to children and grandchildren.

While gifting doesn't eliminate the income tax owed on the RMD, it allows retirees to redirect required withdrawals toward family support rather than additional spending.

Ways retirees can ensure they never miss an RMD

The IRS places responsibility squarely on the account owner, but retirees still have tools to stay compliant.

Many custodians provide annual RMD notices, and retirees can choose to take distributions earlier in the year rather than waiting until December.

Some retirees also choose consistent withdrawal schedules to remove deadline pressure altogether.

Bottom line

RMDs are unavoidable, but penalties for missing them don't have to be. The IRS rules are clear that retirees are responsible for knowing when distributions begin, how much to withdraw, and when deadlines apply.

Understanding the rules and acting early can keep more money in your retirement plan where it belongs.

Ultimately, however, the right move depends on your situation, and that's worth a conversation with a pro.

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