If you turned 73 this year, the IRS has a birthday present for you: a mandatory withdrawal from your retirement accounts, whether you need the cash or not.
It's called a Required Minimum Distribution, or RMD, and it applies to traditional IRAs, 401(k)s, and most other tax-deferred accounts.
Miss the deadline, and the penalty is 25% of the amount you should have withdrawn — dropping to 10% if you fix it fast.
Here's the part that trips people up: the deadline is April 1 of the year *after* you turn 73 for your very first RMD.
Miss that second one, and you're staring at a penalty that can run into thousands of dollars.
Financial planners say this is one of the most common — and most avoidable — mistakes older Americans make.
The calculation itself isn't mysterious, but it's not intuitive either.
You divide your account balance as of December 31 of the prior year by a life expectancy factor the IRS publishes in tables.
The older you get, the smaller the divisor, the bigger the required bite.
Your percentage withdrawal climbs every single year.
Because a lot of people who retired recently are sitting on balances that grew nicely during the long bull market.
A bigger balance means a bigger RMD, which means a bigger tax bill.
Retirees who don't need the money often reinvest it in a taxable brokerage account, but they can't avoid the tax hit on the way out.
There's a wrinkle worth knowing: if you're still working and contributing to a 401(k) at your current employer, you may be able to delay RMDs from *that* plan until you actually retire.
But this exception doesn't apply to IRAs, and it doesn't apply to old 401(k)s from former employers.
Plenty of people get this wrong and owe penalties they didn't see coming.
The Roth IRA crowd gets a pass entirely — Roth accounts have no RMDs during the owner's lifetime.
That's one reason conversions have gotten more popular, though converting a large traditional IRA can push you into a higher bracket and trigger Medicare surcharges.
Take your RMD in December, not January, so you have the full year's balance picture.
Consider a qualified charitable distribution, which lets you send up to $105,000 (indexed annually) directly to charity and count it toward your RMD without it hitting your taxable income.
And if you have multiple IRAs, you can take the total from one account — but 401(k)s must each be handled separately.
The bigger point: nobody at the IRS is going to call and remind you.
Custodians like Fidelity and Vanguard usually flag it, but the legal responsibility is yours.
Set a calendar reminder, or better, ask your custodian to set up an automatic distribution so you never have to think about it again.
Our take: RMDs aren't a scam, but they're a tax bill dressed up as a rule, and the people who benefit most are the ones who plan a decade ahead — not the ones who get a letter in February.
If you're anywhere near 73, spend an hour with a fee-only advisor or a good tax preparer now.
Final Thoughts
The 25% penalty is entirely optional, and it's the most expensive way to learn how the rule works.