What Happens if You Don't Take Your Required Minimum Distribution (RMD) in Retirement?

All retirees 73 and older must take required minimum distributions (RMDs) -- mandatory annual withdrawals -- from certain retirement accounts by Dec. 31. There are exceptions for Roth accounts and employer-sponsored plans if you're still working and own less than 5% of the company. Also, those who just turned 73 this year have until April 1, 2025, to make their RMDs for 2024.

But if none of the above rules apply to you, you only have a few weeks left to make your 2024 RMD. This could raise your tax liability for the year and may force you to sell some of the assets you'd rather hold. But the tax consequences of skipping your RMD are a much bigger headache.

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What happens when you don't take your RMD?

RMDs are required annual withdrawals. The exact amount varies depending on your age and account balance at the end of the previous year. To calculate yours, take your account balance at the end of 2023 and divide it by the distribution period for your age, listed in the IRS Uniform Lifetime Table.

For example, if you're 75 and you had a $500,000 traditional IRA balance at the end of 2023, you'd divide the $500,000 by the 24.6 distribution period for a 75-year-old person, giving you an RMD of $20,325. You may withdraw more than this if you wish, but withdrawing less is a bad idea.

The IRS will charge you a 25% penalty on the amount you fail to withdraw if you don't take your full RMD. In our example from above, if you only withdrew $10,325 in 2024, the IRS would charge you a $2,500 penalty tax on the $10,000 of your RMD that you didn't take. This would likely cost you more than just withdrawing the full $10,000 and paying income tax on it.

To be clear, you don't have to spend your RMD -- you just need to take it out of your retirement account. You could leave it in savings or invest it in a taxable brokerage account if you'd rather hold onto the cash for a while longer. The whole point of RMDs is to make sure you take the money out of your tax-advantaged retirement accounts to give the IRS its cut.

But what if you don't want to take your RMD?

While skipping RMDs isn't advisable, there's another option if you really don't want to take an RMD that will raise your tax liability this year: You can make a qualified charitable distribution (QCD) instead.

This is where you direct your retirement account provider to transfer your RMD or any portion of the RMD you haven't taken for yourself to a qualifying tax-exempt organization. It's important that the money goes directly from the retirement account to the charity without ever passing through your hands. If you withdraw the funds and then donate them to a charity, you'll be able to claim an itemized charitable donation deduction but the IRS will still count the donated funds as part of your taxable income for the year.

If you follow these steps, you'll still have to make retirement account withdrawals, but the government won't add these QCDs to your taxable income for the year. This gives you a bit more control over your tax liability while allowing you to contribute to a worthy cause.

Is there any way around RMD penalties?

Unless this is the first year you're required to make an RMD, you must complete yours by Dec. 31, 2024. However, if you fail to do so, you may be able to reduce the 25% penalty to 10% or even eliminate it altogether if you act promptly.

The IRS will reduce the penalty to 10% if you correct the error within two years. To do this, you must withdraw the RMD not taken and fill out IRS Form 5329. It may eliminate the penalty entirely if you can show that the failure to take the RMD was due to a reasonable error.

For example, if your retirement plan administrator made a clerical error or a severe natural disaster prohibited you from taking the RMD on time. You can explain your circumstances and request the penalty waiver by attaching a letter to your Form 5329.

This isn't a guarantee you'll avoid penalties entirely, though. So it's best to use these last few weeks of 2024 to verify that you've taken all RMDs for the year. If not, act promptly to ensure you've completed them by Dec. 31.

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