Retirees: Take Your Required Minimum Distribution Before 2026 to Avoid Penalties and Maximize Tax Benefits

It’s hard to believe, but 2025 is already winding down. Soon, many of us will be carving turkey, rushing to complete last-minute holiday shopping, and gathering with loved ones to exchange gifts.

Before the year ends, it’s also a good time to review your finances and make sure your retirement planning is on track. If you’re retired, there’s one important step you should consider taking before 2026 begins.

If you have money in a traditional retirement account—such as a Traditional Individual Retirement Account (IRA) or a 401(k) plan—and you are 73 years of age or older, you may be required to take a required minimum distribution, commonly referred to as an RMD. The Internal Revenue Service (IRS) mandates RMDs to ensure that these tax-advantaged accounts are eventually taxed and not simply used to pass wealth down through generations without paying taxes.

For your first required minimum distribution, you have until April 1 of the year following the year you turn 73 to withdraw the funds. For example, if you turned 73 in 2025, your initial required minimum distribution must be taken by April 1, 2026.

After your first required minimum distribution, all subsequent distributions must be taken by December 31 of each year. Failing to do so can result in a steep penalty—up to 25 percent of the amount you were supposed to withdraw. The IRS may reduce the penalty to 10 percent if the mistake is corrected quickly.

The amount of your required minimum distribution is determined based on the balance of your retirement account and your life expectancy, as calculated according to IRS tables. Most financial institutions that manage your IRA or 401(k) will calculate the required minimum distribution for you. If they don’t, or if you’re unsure how to calculate it yourself, a financial advisor can assist in determining the correct amount.

For some retirees, required minimum distributions are straightforward, especially if they are already drawing regular income from their retirement accounts. However, required minimum distributions can present a challenge for those who do not need the money, as they create an immediate tax liability.

If you don’t need the money from your required minimum distribution, one strategy to consider is a qualified charitable distribution (QCD). A qualified charitable distribution allows you to transfer money directly from your IRA or 401(k) to a registered charity. This satisfies your required minimum distribution while keeping the donated amount out of your taxable income, providing both philanthropic and tax benefits.

Another approach is to take your required minimum distribution and reinvest it in a taxable brokerage account, a certificate of deposit ladder, or another income-generating investment. While this strategy does not eliminate taxes on the withdrawal, it ensures that the funds continue working for you rather than simply sitting idle. The key limitation is that the money cannot be returned to a tax-advantaged account once withdrawn.

By planning your required minimum distributions carefully, you can avoid penalties, reduce your tax burden, and make your retirement savings work efficiently—whether through charitable giving, reinvestment, or a combination of both.