Retirees: Miss the Dec. 31 RMD deadline and face a 25% penalty

Nearly nine million IRA owners are required each year to take what the tax code calls required minimum distributions, better known as RMDs.

An RMD is “an annual distribution required by the Internal Revenue Code from traditional IRA or 401(k) accounts,” according to the Investment Company Institute. 

Miss the withdrawal, and the IRS can impose a stiff penalty.

And new research from Vanguard suggests that mistake is far from rare.

Nearly 7% of Vanguard IRA investors failed to take their required distribution in 2024. That translates to an estimated 585,000 IRA holders nationwide who missed an RMD and paid an average tax penalty of more than $1,100, the research found.

In the aggregate, those who missed withdrawals are costing investors as much as $1.7 billion a year, a reminder that even routine retirement account rules can carry an expensive price tag when overlooked.

“Missed RMDs are a billion-dollar mistake,” Aaron Goodman, a Vanguard senior investment strategist and leader of the research team, said in a press release. 

Thomas Van Spankeren, a certified financial planner, with RISE Investments, agreed with that assessment. “Failing to take an RMD can lead to major tax headaches,” he said. 

By way of background, RMDs are calculated using IRS formulas tied to an account holder’s age. The goal is to draw down the account balance over the individual’s remaining life expectancy, or over the joint life expectancy of the account owner and a spouse.

Historically, RMDs began at age 70½, but Congress has pushed that starting age higher in recent years. Today, investors age 73 and older with traditional IRAs and traditional 401(k) plans generally must take an RMD each year or face a tax penalty.

In most cases, the withdrawal must be made by Dec. 31. Investors taking their first RMD, however, have until April 1 of the following year to comply, a one-time grace period that can complicate tax planning if it results in two taxable distributions in the same calendar year.

RMDs are mandatory in theory but voluntary in practice, and many investors fail to take them, according to Vanguard. 

Vanguard’s research focused on the firm’s clients with traditional IRAs. Researchers found that 6.7% of RMD-age clients did not take any withdrawal in 2024.

Among these clients, the average RMD amount was $11,600, generating a potential tax penalty of between $1,160 and $2,900 (at penalty rates of 10% and 25%, respectively). Another 24% of clients took a withdrawal in 2024 that was below the RMD threshold, while 69% took a withdrawal at or above the RMD level.

An important limitation of Vanguard’s analysis is that the researchers only consider Vanguard IRA accounts. It’s possible, Vanguard noted in its release, that some clients who withdrew less than required in their Vanguard IRAs still complied with RMD rules by taking additional withdrawals from non-Vanguard IRAs. 

Vanguard based its estimates of aggregate tax penalties on the 6.7% of clients who did not take any withdrawal in 2024, since these “complete” misses are more likely to indicate persistent RMD errors across IRA providers.

“Reducing the rate of missed RMDs by even a modest amount could save investors hundreds of millions of dollars each year,” said Andy Reed, Vanguard head of behavioral economics research. 

According to Vanguard, missed RMDs are most common among self-directed investors with lower balances. The majority of investors (56.8%) with balances under $5,000 missed their RMD in 2024, while only 2.5% of investors with balances over $1 million did.

“Missed RMDs are more common for some investors and more costly for others,” Goodman said. For instance, self-directed investors are three times more likely to miss RMDs than advised investors. However, neither age nor gender predicted the likelihood of missed RMDs.

Carlos Salmon, a certified financial planner with Wooster Square Advisors, agreed that much of the risk around missed RMDs shows up when investors are left to manage the process on their own.

“Most Vanguard IRA holders are self-directed,” he said. “They’re not working with a CFP, and many have accounts spread across multiple custodians. That complexity is usually where things break down.”

Missed RMDs are “sticky”

RMD behavior tends to carry over from year to year, according to Vanguard. The majority of investors (55%) who miss an RMD in one year also miss their RMD in the following year, while only 3% of those who take RMDs in one year miss them the next year.

“Most investors seem to make RMDs a routine,” Reed said in a release, “but rather than ‘set and forget,’ many simply ‘forget and forget.'”

“It does not surprise me that statistics show this is a big problem,” said Sarah Brenner, director of retirement education at Ed Slott and Company. “It also does not surprise me that people who miss RMDs tend to miss them in multiple years. We often hear of people who have missed RMDs going back a number of years.”

Inherited IRAs create missed RMDs, too

For his part, Van Spankeren noted that recently his clients have been inheriting IRAs. “While my clients are not at RMD age, inherited IRAs have different RMD rules that must be followed,” he noted. “Most of my clients are unaware of these RMD requirements.”

The rules for inherited IRAs can be confusing in the wake of SECURE Act 2.0.

Inherited IRA rules now hinge on two big distinctions: who the beneficiary is (spouse, “eligible designated beneficiary,” or everyone else) and whether the decedent died before or after their required beginning date (RBD), with the 10‑year rule the default for most non‑spouse heirs.

The 10‑year rule says that most non‑spouse beneficiaries who inherit an IRA (or defined contribution plan) from someone dying in 2020 or later must fully distribute the account by December 31 of the 10th year following the original owner’s death.

Avoiding RMD mistakes 

So how can investors avoid missing an RMD?

According to Vanguard, the answer lies in a combination of automation, professional advice, and account consolidation. “We’ve already seen automated solutions improve other investor outcomes, and taking a similar approach to RMDs could help eliminate unnecessary tax penalties,” the firm said.

At the most basic level, investors should avoid waiting until the last minute, said Brenner.

“Getting RMDs out before the end of the year is a good practice,” she said, noting that once December arrives, the busy holiday season makes it easy for things to be overlooked.

That advice resonates with planners who see the year-end bottleneck firsthand.

“The last couple of weeks of the year are closely linked to RMD processing time, which is why I’ve always encouraged clients to complete their RMDs early in the year,” said André Small, founder of A Small Investment.

To reduce risk, Salmon also said he typically recommends taking RMDs earlier in the year. “I generally recommend clients take their RMDs in late March,” he said. “That gives folks liquidity ahead of tax season and flexibility to cover any tax liabilities.”

Automation, he added, is critical, particularly given the unexpected. “Early in my career, I had a client who delayed their RMD until December every year and passed away unexpectedly before it was taken,” he said. “What should have been a routine distribution turned into a multi-month administrative mess. The takeaway is simple: automation helps, consolidation helps, and advice helps.”

Small said he hears many reasons clients delay taking distributions, but in most cases waiting creates unnecessary risk. “Rather than focusing on the ‘minimum’ in required minimum distributions, I suggest clients think about the maximum they can withdraw without pushing themselves into a higher tax bracket,” he said.

That analysis, Small noted, should be done in the context of the client’s full financial picture. The benefit, he said, is paying tax at today’s known rates rather than at future rates that are uncertain.

Beyond timing, Brenner recommends consolidating IRAs to simplify the process. Aggregating RMDs from multiple accounts can make compliance easier and reduce the risk of a missed withdrawal.

Salmon echoed Brenner’s emphasis on consolidation. “If you’ve got multiple IRAs with multiple custodians, you’re responsible for tracking down the RMD amount for each account and ensuring the aggregate is taken in the year it’s due,” he said.

Working with a financial adviser who can monitor retirement accounts is another important safeguard, Brenner said. Advisers can help track deadlines, calculate distributions, and coordinate withdrawals across accounts.

Brenner also noted that IRA custodians are required by the IRS to notify account holders when an RMD is due and to provide the required amount upon request. As a result, IRA owners should already have access to key information needed to stay compliant.

Even so, mistakes do happen, Brenner said.

“It is good to know that you can ask for a waiver of penalties on missed RMDs by taking the missed RMD and filing Form 5329, along with a statement explaining why the RMD was missed,” she said. “If it is for a reasonable cause, the IRS may waive the penalty. We have seen many IRA owners go through this process with success.”

David Demming, a certified financial planner with Demming Financial, said his firm does more than 100 RMDs annually and generally avoids penalties for clients.

“On the occasions when RMDs are missed, we tell them to ask for a waiver with the more creative getting paid or better, not paying a penalty,” he said. “The government has been lenient when the story was good enough.”

To reduce the odds of an error in the first place, Vanguard said one of the most effective strategies is to use automatic RMD services, which are typically offered at no cost by IRA providers.

Financial advisers can also set up automatic distributions and tailor both the timing and amount of withdrawals to meet an investor’s income needs. Consolidating smaller accounts may further reduce the risk of overlooking RMDs from what are often referred to as “small pots” and help simplify broader retirement income decisions.

“With investors changing jobs nine times or more in their working careers, it’s tough to keep tabs on all retirement accounts,” said Goodman. “Combining IRAs and putting RMDs on autopilot takes forgetting out of the equation.”

Other RMD mistakes to avoid

Some of the biggest RMD pitfalls arise outside the basics, particularly for higher-income retirees, said Joseph Piszczor, a certified financial planner with Washington Family Wealth. 

Piszczor also cautioned that taking more than the minimum can be smart, but only when done carefully. “Investors may benefit from taking more than their anticipated RMD in certain years,” he said, provided withdrawals stay within the current tax bracket and do not trigger higher Medicare premiums through Medicare IRMAA. 

The same modeling, he said, applies to partial Roth conversions, which can be effective long-term tax strategies but “only when carefully modeled to avoid paying unnecessary taxes today.”

For charitably inclined investors, Piszczor pointed to qualified charitable distributions as another option. “Using RMDs to fund charitable gifts can be a tax-efficient way to satisfy the requirement while supporting causes you care about,” he said, including in some cases from inherited IRAs.

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