Retiree Misses 401(k) RMD Rule, Faces 25% IRS Penalty

Personal finance complexities can lead to unexpected financial penalties, particularly for retirees managing multiple retirement accounts. A common pitfall involves the aggregation of Required Minimum Distributions (RMDs) from different account types. While RMDs from multiple traditional IRAs can be combined and withdrawn from a single account, this aggregation is not permitted for 401(k) accounts. Each 401(k) $RMD+WL must be taken directly from its specific account.

Failure to adhere to these distinct rules can trigger a substantial IRS excise tax. The penalty for a missed $RMD+WL is typically 25% of the shortfall amount. However, this tax can be reduced to 10% if the error is corrected promptly within the IRS's designated correction window. For retirees living on fixed incomes, such a penalty can represent a significant financial burden. It's also important to note that 403(b) accounts follow their own unique aggregation rules, separate from both IRAs and 401(k)s. Some retirees may opt to roll old 401(k) accounts into an IRA before age 73 to bypass these aggregation issues, though this move may forfeit certain creditor protections and tax treatments.