Here’s a rule that’s cost retirees real money, and hardly anyone sees it coming.
If you’re 73 or older and you own a couple of IRAs, the IRS lets you add up what you owe across all of them and take the entire withdrawal from just one account. Tidy. Convenient.
Now assume that same convenience covers the 401(k) you left behind at a job three employers ago. That assumption is where a 25% penalty hides.
Your IRAs are forgiving
A required minimum distribution — an RMD — is the money the IRS forces you to pull out of most retirement accounts each year once you turn 73, so it can finally tax savings you’ve sheltered for decades. The deadline is Dec. 31, and missing it hurts. (I’ll get to how much shortly.)
With traditional IRAs, the IRS at least makes the mechanics easy. You calculate the RMD for each IRA separately, then take the total from any one of them — or split it any way you like.
Say your three IRAs add up to a $20,000 RMD. Pull all $20,000 from the one holding investments you’d just as soon sell, leave the other two alone, and you’re square with the government. It only cares that the total comes out. That’s more than a lot of retirees realize about the deadline.
Your 401(k) is not
Here’s the trap. Employer plans don’t get that flexibility. A 401(k), a 403(b), a 457(b) — each one has to pay out its own RMD, from its own account. You can’t cover a 401(k)’s RMD by taking a little extra from an IRA, and one 401(k) can’t cover another.
There’s a single narrow exception. If you hold more than one 403(b), those can be pooled among themselves, the way IRAs are. But a 403(b) still can’t be lumped in with an IRA.
So picture a retiree with two IRAs and a 401(k) she never rolled over. She adds up everything, takes the whole thing from one IRA, and figures she’s done. She isn’t. The 401(k)’s share is still sitting there, undistributed, the day the deadline passes.
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The penalty is 25% — but there’s a lifeline
Come up short on an RMD and the IRS charges an excise tax of 25% of whatever you failed to withdraw. On a $6,000 shortfall, that’s $1,500 — gone, for a bookkeeping slip.
The reprieve: Fix it fast and the 25% drops to 10%. Take the missed amount the moment you catch it, file IRS Form 5329 with your return, and attach a short note explaining the error and how you fixed it. The IRS can waive the penalty outright if you show the shortfall was an honest mistake you corrected promptly.
Skipping an RMD altogether is one of the most expensive mistakes a retiree can make. The aggregation trap is just a sneakier version of the same bill.
3 actions to take to avoid penalties
1. List every account and its own RMD
Write down each IRA, each 401(k), each 403(b) — and the RMD for each one. Seeing the employer plans stand alone on paper is the whole point, because standing alone is exactly how the IRS treats them.
2. Roll old employer plans into an IRA
The cleanest fix is to stop having stray 401(k)s at all, but timing matters here. If an RMD for a 401(k) is already due for the year, that portion can’t be rolled over — it has to come out of the 401(k) first, then you can move the rest to an IRA.
After that, the balance falls under the friendlier IRA rules, where one withdrawal can satisfy the lot. It’s also one less account to track for the rest of your life.
3. If you already missed one, move now
Don’t wait for a letter. Take the shortfall today, file Form 5329, and make the case for the 10% rate or a full waiver.
And if you’re charitably inclined, a qualified charitable distribution can satisfy your IRA RMD while keeping the money out of your taxable income — a rare break the IRS actually allows.
The system won’t warn you
None of this is about the IRS being fair. It’s about the IRS being precise. It wrote one rule for IRAs and a stricter one for employer plans, and it’s under no obligation to remind you which is which before the bill arrives.
So do it yourself. Pull every account into view before Dec. 31, and don’t let a 401(k) you forgot about become a penalty you never had to pay.
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