Believe it or not, the IRS can penalize you if you don’t use your money. Yes, you read that right, the U.S. government requires retirees over the age of 73 to withdraw money from their retirement plan at least once a year. It’s in writing, and it’s called the required minimum distribution (RMD), and it dictates that once you reach a certain age, you can’t leave your money growing tax-free forever.
If this is your case and you’re a Scrooge McDuck who doesn’t need to withdraw money from your pension plan, you’ll probably have to make a withdrawal—and, of course, pay tax on it—before the end of the year. Otherwise, the U.S. government may penalize you with hefty fines for not withdrawing your money. In the end, the bank always wins, right?
What is the RMD? Why does it exist?
An RMD is a minimum amount that you must withdraw from your retirement account at least once every 365 days. Yes, you must withdraw money from your retirement plan at least once a year—by law, believe it or not.
The fact is that the government wants, above all, to be paid taxes, and when you save in a 400 1K plan or an IRA account, the money you deposit is “before taxes.” Why did the government allow this? Because it prefers to wait for that money to grow in investment funds and, thanks to compound interest, charge you much more tax in a few decades when you withdraw it. The required minimum distribution (RMD) is a crude mechanism on the part of the government to ensure that this money finally enters the economy and is taxed.
Deadline and hefty penalties
It’s never too late to feel like Cinderella, and this is the situation for some retirees who simply haven’t needed to withdraw money from their pension plans in 2025. However, most taxpayers must complete this step before the clock strikes midnight on December 31. Otherwise, the carriage will not turn into a pumpkin, but they will receive some of the most aggressive penalties in the US tax code.
The government even calculates the minimum withdrawal you should make. It imposes a high percentage penalty on this amount. In the past, this penalty was as high as 50%, but now it stands at 25%. This means that if you were supposed to withdraw $10,000 a year but didn’t, the IRS could penalize you by taking $2,500 as a fine. If it was an oversight and you correct the error quickly, the IRS will be lenient and potentially reduce the penalty to 10%. However, no one likes to pay extra money, so it is still an unnecessary expense that can be avoided if we are careful.
Who is affected by this rule?
The age at which you must begin taking these distributions is 73 under current US law. If you turn 73 in 2025, you have until April 1, 2026, to make your first withdrawal from your retirement account. However, this is a tax trap: if you wait until 2026 to make your first withdrawal, you will actually have to make two withdrawals that year—one for 2025 and one for 2026. This could inflate your annual income, putting you in a higher tax bracket and requiring you to pay more taxes.
FAQs
Do I need to pay taxes on the money I withdraw as an RMD?
Yes, this money is seen as ordinary earnings and must be reported on your taxes (when you file them yearly).
Can I donate my RMD to a charity?
Yes, you can donate up to $108,000 through a Qualified Charitable Distribution (QCD) without being taxed as ordinary income. Ask an accountant for more details.
How do I inform the IRS that I have already made my compulsory withdrawal?
Your financial institution (i.e. bank) will send two copies of Form 1099-R at the end of the year: one to you, and one straight away to the IRS, so you don’t need to do anything else—apart from holding onto it until tax season!