The Deadline Almost Nobody Can Name, and the 25% Penalty Behind It

Most retirement rules punish you for taking money out too early.

There is one that punishes you for leaving it in.

It starts at 73, it carries a 25% penalty, and almost nobody can name the date.

The deal you made without noticing

Every dollar you put into a traditional 401(k) or IRA went in untaxed. That was the deal. You skip the tax now, you pay it when you take the money out.

The part nobody mentions is that the IRS does not wait forever for its half.

At 73 it comes to collect, and it sets the schedule. From that year on you have to take a minimum amount out of those accounts every year and pay income tax on it. Whether you need the money or not.

That is all a required minimum distribution is. Not a fee, not a punishment. Just the bill arriving on the IRS calendar instead of yours.

How much, and by when

The amount comes from one sum.

Take whatever was in the account last December 31. Divide it by a number the IRS publishes for your age. At 73 that number is 26.5.

So an $800,000 IRA gives you $30,189 you must take out and declare that year. Roughly 3.8 cents of every dollar in the account.

One thing catches people early. The sum uses last December’s balance, not today’s. If the market dropped in the spring, your required withdrawal is still based on the higher number from before the fall. It is fixed in January and it does not move.

The deadline every year is December 31. Simple enough. It is the first year that causes the trouble.

Why you keep seeing 75

Search this and half the results say 75. Those articles are describing a rule that has not started yet.

A 2022 law does raise the age to 75, but only for people born in 1960 or later. The first person who actually begins at 75 does not do so until the mid 2030s.

If you are getting close to this now, your number is 73. The IRS says so plainly, everywhere it publishes.

What it costs if you miss it

Take out less than you were supposed to and the IRS charges 25% on the shortfall.

Not 25% of your account. 25% of the amount you failed to withdraw.

Miss a $30,000 withdrawal and that is $7,500, on top of the income tax you still owe when you finally take the money.

Two things soften it. Fix the shortfall within two years and the 25% drops to 10%. And the penalty can be waived completely if it was an honest mistake and you are putting it right. You file Form 5329 with a short letter explaining what happened. The IRS grants these. But you have to ask, and nobody asks about a penalty they have never heard of.

Worth being blunt about one thing. Your bank or broker may work out the number for you. They may even send a reminder. The responsibility sits with you, not with them.

The first year is where people get hurt

Here is the expensive part, and it shows up looking like a favour.

Your first withdrawal covers the year you turn 73. But you are allowed to push that first one to April 1 of the next year.

It sounds like a grace period. It is not. You have not skipped anything. You have shoved it into the following year, where a second withdrawal is already waiting.

Because the second year’s withdrawal is still due by December 31 of that same year.

So one goes out in March and the next in December. Both land on a single tax return. Two years of withdrawals, one year of tax.

Turn 73 in 2026 with that $800,000 and delay, and you report about $60,000 in 2027 instead of about $30,000 in each of two years. Same money. Very different bill.

Why doubling up hurts three times

Your tax rate. That extra $30,000 does not get taxed at your average rate. It piles on top of everything else and gets taxed at your highest.

Your Social Security. Above a certain income, every extra dollar you withdraw pulls part of your Social Security onto your tax return with it. A doubled year can drop you into that zone.

Your Medicare premium, two years later. Medicare looks back at your tax return from two years ago to decide what you pay. And it works like a step, not a ramp. Cross the line by a single dollar and the whole step applies. For 2026 that line is $109,000 of income, or $218,000 for a couple, and stepping over it costs about $1,148 a year, for each person on Medicare.

The $1 Withdrawal That Adds $1.85 to Your Taxable Income

Four things that trip people up

Your IRAs share. Your old 401(k)s do not. If you have three IRAs, you work out the amount for each one, add them up, and can take the whole lot from whichever IRA you like. Old 401(k)s do not work that way. Each one needs its own withdrawal, from that account. Forgotten 401(k)s at former employers are where this goes wrong most often.

Still working does not help your IRA. If you are still employed at 73, you can usually delay withdrawals from your current employer’s plan, unless you own 5% or more of the business. That break never applies to an IRA. IRAs start at 73 whether you are working or not.

Roth accounts are left alone. Nothing is forced out of a Roth IRA or a Roth 401(k) while you are alive. Your heirs face different rules.

Taking extra does not earn you credit. Withdraw double this year and next year’s requirement is exactly the same. And you cannot move the money into another retirement account to keep it sheltered. Once it is out, it is income.

How to avoid most of this

Take the first one in the first year. That single choice removes the worst trap in the rule. The April 1 extension exists, but using it stacks two years of withdrawals onto one tax return. Unless you have a reason to want the income later, take it in the year you turn 73 and the problem never happens.

If you give to charity, give from the IRA. From age 70½ you can send money straight from a traditional IRA to a charity. It counts toward your required amount, and it never shows up as your income. So it cannot raise your tax rate, cannot pull your Social Security in, and cannot push you over the Medicare line. The 2026 limit is $108,000.

And if you are still in your sixties, shrink the pot now. The required amount is worked out from your traditional balance. Move money to a Roth in a low income year and that money is gone from the calculation forever, along with every future withdrawal it would have forced. That work has to happen before 73. After that, the window is shut.

What to do this week

Work out the year you turn 73 and write down the December 31 that follows it. That is your date.

If that year has already passed, go and check this year’s withdrawal actually left the account. Not scheduled. Gone.

If you have old 401(k)s sitting at former employers, list them. Each one needs its own withdrawal and nobody is watching the whole picture for you.

And if 73 is still years away, treat this as the advance notice. At 73 the IRS starts setting the schedule for your traditional accounts. Every year before that is a year you get to set it yourself.

The Withdrawal Order That Can Save You Six Figures in Retirement Taxes

Do you know which year yours starts? Tell me in the responses, and follow along for more on keeping what you build.