Reduced penalty for missing RMDs

One of the lesser mentioned changes that SECURE ACT 2.0 made was to reduce the penalty for not taking an RMD in the year it was required. The penalty used to be 50% of the RMD amount. Beginning 1/1/23, the penalty was reduced to 25%, and if the missed distribution is corrected within 2 years, it will only be 10%

The significantly lower penalty makes me wonder that for someone who waits until the end of the year to take their RMD (because in 2 out of 3 years, it’s likely that the account balance will be higher at the end of the year) in order to maximize the growth in the tax deferred account, if it would be worth it in some very down years to pay a 10% penalty in order to wait up to 2 years for a recovery.



On average 2 out of 3 years will show higher at year end. That’s true. BUT, from a quick eyeballing of an S&P500 chart, after “very down years”, the 2 out of 3 observation doesn’t always appear. Seems like after “very down years” it takes longer than 2 years to recover (2008 down, didn’t recover until 2012/13). And sometimes, after a “very down year”, the next year, and even the year after may be down even more (2000 down, 2001 down more, 2002 down more)!


That assumes the IRA is fully invested. I’ve still got a while (2025) before RMD kicks in, but my multi-year (5 or so) cash cushion is in my traditional IRA. Since my RMD will come from the cash, it makes no difference when I make the withdrawal.

But it will make a difference when you choose to replenish the cash to get to 5 years again. But yes, having that cash cushion, as always, gives you the flexibility of not “selling when down”. That’s why it is recommended so often.

That flexibility I have is so much greater than what would come from AJ’s idea of accepting the penalties as to overwhelm it. At least the way I manage cash it would.

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I don’t think paying the penalty would ever make sense. That’s because paying the penalty only gives you extra tax deferral for a year or two. You could just as well have withdrawn the lower amount (after a big down year), invest it in the same stuff, wait a year or two for it to recover, and then pay the capital gains tax on the gains of the recovery. Instead of paying 10% on the whole thing, you pay 0%/15%/20%/23.8% on just the gains portion.

(Now, if the penalty were just 10% to indefinitely keep it in the IRA and retain the tax deferral for an additional decade or two, then we can recalculate and see.)


Since you can take an RMD “in-kind”, I don’t see how paying even a 10% penalty would be overcome. In fact, if the market is down then you are taking out even more shares since they are a lower price so an in-kind distribution that is taxed as income and then sold in the future as a capital gain would be even more lucrative.

That sounds like market timing to me. (Don’t take offense - intended as a good natured tease because you insisted that I was timing the market when I accumulated excess cash at the end of 2021 and stared averaging back in in Feb of this year.)

I’m not saying I would do it. In fact, when I get to RMD age, I’m probably just going to have 1/12 of the annual amount put into my account monthly. During the accumulation phase, dollar cost averaging seemed to work pretty well. I haven’t seen anything that would indicate that dollar cost averaging during the decumulation phase won’t work well, either.

That said, I’m just wondering if people might start doing this.


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Since you can take an RMD “in-kind”, I don’t see how paying even a 10% penalty would be overcome. In fact, if the market is down then you are taking out even more shares since they are a lower price so an in-kind distribution that is taxed as income and then sold in the future as a capital gain would be even more lucrative.

Seriously, why are you even worrying about a 10% penalty? Or, keeping an excessive amount of cash in your tax-deferred retirement account? What loss are you going to incur? The answer, most likely, is none!

You might have some losses on securities that were recently purchased; however, the bulk of your securities will be sold at a gain even with recent market values in the last year being greater than the sale price that you received.

I withdraw my RMD from my tax-deferred retirement accounts during the first 1-2 weeks of January. I pay quarterly fees to investment firms to manage my tax-deferred retirement accounts. Ignoring the dividends and interest received from the securities, my annual net capital gains since 2019 has been 3 times my RMD plus quarterly management fees.

Personally, I keep excess cash in banks and credit unions and use that money to pay federal and state income taxes.

I keep mine in the Fidelity Money market where the interest rates are paying 4.77% - above my local bank options and even Apple’s Savings account through Goldman Sacks.

I am confused. I did not claim you could take/harvest a loss - and on an IRA it is irrelevant. It is all taxed as income so there are no losses. The important thing is that share prices are down (regardless of purchase price) so you are pulling out more shares per dollar.

I used to keep it at my brokers money market fund, also about 4.7-4.8% now. But more recently, I’ve been buying assorted treasury bills each week which usually brings the yield over 5.2%.

Apparently, I’m confused as well! I had read several discussion threads but didn’t have time to add my comment at the time. Later, when I had time to add a comment I may have selected the wrong discussion. My apologies for the confusion.

Somewhere in the discussions that I had originally read there were comments about keeping a large amount of cash in an IRA to avoid selling securities at a loss when you had to make a RMD withdrawal. I opened my original IRA in 1975 and my original 401(k) in 1982. I started rolling over my 401(k) to my IRA in 2001. My final rollover was in 2013 when I retired. I started RMD withdrawals in 2015.

Since 2015, I have always had to sell securities to satisfy my RMD withdrawals. While some security lots were sold at a loss, the net gains from security sales plus dividends and interest received have always exceeded my RMD. I don’t see the need to keep excessive amounts of cash in an IRA.

As you correctly point out RMD withdrawals are taxed as ordinary income. The net capital gains you might experience in a given year only impacts future RMD withdrawals.

I just learned that there is yet another way to reduce RMDs in retirement. It is something called a QLAC - Qualified Longevity Annuity Contract. It is a way to use tax-deferred money (not sure if only in 401k or also in IRA, but likely both) to purchase an annuity and have that money not be counted as part of your total for calculating the RMD.

Since this is an insurance product, it is actuarily neutral minus a 10 or 15 percent profit for the insurance company, so it can’t improve the overall results across a population of retirees. But there may be certain circumstances where it is useful if you need to lower RMD for external (outside the tax deferred segment) reasons.

Here is a link to the article about it.

I would disagree with this premise. The article is behind a paywall, so I can’t see it, but even the headline is promoting QLACs as ‘longevity insurance’, not as a way to avoid RMDs. Further, here’s an analysis from Kitces that shows that QLAC buyers actually only have a 50/50 chance of living long enough to recover their initial investment Don't Use A QLAC To Avoid IRA RMD Obligations ( This analysis is based on buying a QLAC at age 69 to avoid RMDs at age 70 1/2, so with the change in RMD ages, the 50/50 may shift a bit, to say, 55/45 based on buying the QLAC at 72 or 74, but that still doesn’t make it a good idea to buy a QLAC just to avoid RMDs QLACs can provide peace of mind to those who are concerned about out-living their money, but as Kitces also points out in this article Longevity Insurance Compared To Stock & Bond Returns ( investments in stocks and bonds generally fare better as longevity insurance than investing in a longevity insurance product. That’s because the insurance company is also investing in stocks and bonds, but they are taking their skim off the top, before they return your money to you.



I don’t think it’s ever a good idea to buy a QLAC. I was just suggesting that perhaps someone could find some good way to use it. It’s hardly ever a good idea to buy any insurance annuity product to begin with. That’s because the net value to the consumers is always the return MINUS the 10 or 15 percent profit to the insurance company. I suppose if someone has already decided to buy longevity insurance outside their tax deferred accounts, they might be advised to use some of the tax-deferred money instead?

I shared the article as a “free social media share” but apparently it didn’t work. Here’s the relevant excerpt -

Annual payouts from a QLAC count as taxable income, but there are some tax advantages. Since the money directed to the annuity is no longer in the retirement account, retirees don’t need to withdraw as much from their savings each year when required minimum distributions begin at age 73. If you have a $1 million retirement account and buy a $200,000 QLAC, your RMDs will be based on the $800,000 balance.

Getting back to topic, I suspect we’ll see more revenue collected because of this change.

That 50% penalty was so onerous (and so poorly monitored), that it was almost never applied. I’ve never had a client pay it, and have had the penalty waived a couple of times after writing to the IRS and asking for a waiver. I even had one client who failed to take RMDs from an inherited IRA for almost 20 years without a peep from the IRS. When I discovered that, I suggested he take a single distribution to make up for the missed ones, and he was looking for funds for a personal project. He agreed to the plan, and began taking annual distributions as well. We never heard anything from the IRS. (And its now far enough in the past that any statute of limitations is long gone, so I don’t mind talking about it now.)

The usual way to get it waived was to plead reduced capacity because of age, show that the missed distribution has been taken, and arrange for automatic withdrawals of future RMDs.

I suspect that with the penalty reduced to 10% most of the time (most missed RMDs are nothing more than clerical errors or errors made from ignorance of the RMD requirements and are corrected promptly), it will be harder to get the penalty waived in the future.

A reasonable penalty that is actually enforced is probably better than an onerous penalty which is almost never enforced.