Millions of Retirees Miss Required RMDs, Face Huge Penalties

When retirees turn 73, they must take required minimum contributions, or RMDs, from their retirement savings accounts. If they don’t, the IRS imposes higher tax penalties. But new research from investment firm Vanguard shows that many retirement account holders simply forget to do so.

Based on an analysis of corporate IRAs, Vanguard researchers found that about 7% of account holders forgot to take an RMD last year. The average amount of RMD missed was $11,600, generating tax penalties of up to 25%, or $2,900 each.

Using those statistics nationally, Vanguard estimates that 585,000 IRA owners miss their RMDs every year, resulting in a combined tax penalty of up to $1.7 billion.

The company’s findings also show that missed RMDs are often not a one-off event. Retirees who miss an RMD one year are likely to miss the next year, too.

“Many investors seem to be making RMDs a habit,” said Andy Reed, head of behavioral economics research at Vanguard, in a report. But rather than ‘forget,’ many simply ‘forget and forget.’

A previous study from the nonprofit Employee Benefits Research Institute found that between 15% and 18% of IRA owners failed to take RMDs in 2017.

IRAs aren’t the only accounts subject to mandatory distributions, either. Traditional employer-sponsored plans such as 401(k)s and 403(b)s also, while Roth accounts are not). Employer-sponsored plans were not included in Vanguard’s analysis, which suggests that the cumulative tax penalties for missed RMDs could be in the billions of dollars each year.

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What to do if you miss a required distribution

The Vanguard report says that RMDs are “mandatory in concept but voluntary in practice.” That leaves room for error — and potentially a lot of tax — because the distribution isn’t automated.

Aggregate distribution rules don’t help either. RMDs are required annually for retirees who turn 73. The first RMD deadline is April 1 of the year following your 73rd birthday. For example, if you turned 73 in 2024, your RMD deadline would be April 1, 2025.

Every year after that, the RMD deadline is December 31st. (To accurately calculate the amount you need to remove a separate can of worms.)

For missing the deadline, the standard penalty is 25% of the missed RMD amount. However, there are ways to reduce it.

If the error is corrected on time within two years and you file IRS Form 5329, the penalty can be reduced to 10%.

The penalty may be waived in full if the missed distribution is “due to a reasonable error and reasonable steps are taken to correct the deficiency,” the IRS said. To get a complete waiver request, you’ll need to file Form 5239 and send an explanation letter to the IRS detailing the issue.

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