Nobody Warned Her That Two Retirement Accounts Meant Two RMD Rules, a 25% Penalty

A 73-year-old retiree has a $700,000 traditional IRA at one brokerage and a $250,000 401(k) still parked with a former employer. She adds the two required minimum distributions together, gets the correct total, and pulls the full amount from the IRA. Now she learns about a steep IRS penalty.

Her scenario is not uncommon. Retirees who never had to think about distribution rules face a rulebook that penalizes technical errors.

Here is the rule that trips people up: RMDs from multiple traditional IRAs can be aggregated. Total them up, pull the whole amount from any single IRA, and the IRS is satisfied.

But a 401(k) RMD cannot be aggregated with IRA RMDs. It must come out of that specific 401(k) account. There are two separate buckets, with two separate rulebooks. When she pulled the entire combined amount from her IRA, she over-distributed from the IRA and under-distributed from the 401(k) by roughly $10,000. That $10,000 is considered a missed RMD, even though her checking account received more than enough in total.

403(b) accounts follow yet another aggregation rule, separate from both IRAs and 401(k)s. Readers with teaching or nonprofit backgrounds carrying old 403(b) balances should know the same trap exists.

How Big the SECURE 2.0 Penalty Actually Is

Under SECURE 2.0, the excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if corrected within the correction window. On a $10,000 miss, that is real money for someone living on a fixed income, especially with the 2027 Social Security COLA tracking toward 3%, which barely offsets ordinary inflation, let alone an unexpected tax bill.

Also worth noting: Our hypothetical retiree’s RMD age is 73. The age-75 start under SECURE 2.0 applies only to people born in 1960 or later.

Three Steps to Fix a Missed 401(k) RMD

The good news is that this mistake is fixable. The IRS can grant waivers when the taxpayer corrects the error and asks properly, following these three steps:

1. Take the late distribution from the 401(k) immediately. Contact the plan administrator, request the shortfall amount, and get the money out of that specific account.
2. File Form 5329 for the year of the shortfall. This is the form that reports the missed RMD and the excise tax owed.
3. Request a waiver for reasonable cause. A short written statement explaining what happened and what was done to fix it goes with Form 5329. The IRS is looking for evidence that the error was inadvertent and corrected promptly.

How to Prevent the Problem

There are two moves that retirees can take to avoid this issue before they reach RMD age:

• Roll old 401(k) accounts into an IRA before reaching RMD age. Once inside an IRA, those dollars become aggregatable with other IRA dollars, and the whole trap disappears.
• Consolidate custodians so one institution sees the whole picture. When Fidelity or Charles Schwab holds everything, their RMD calculation and distribution engine handles the paperwork correctly by default.

You should know that rolling a 401(k) into an IRA can forfeit net unrealized appreciation treatment on employer stock inside the plan and can weaken certain federal creditor protections. If either applies, the rollover decision deserves a closer look.

For anyone approaching RMD age, experts advise that one year before distributions begin, do a written inventory of every retirement account, its custodian, its balance, and the aggregation rules that apply. A fee-only advisor can help avoid mistakes.

For a look at other IRS rules that quietly drain retirement accounts, we built a free tax trap map for retirees.

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