Many Retirees Are Making This $1.7 Billion Mistake With Their IRAs
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Once retirees turn 73, they must take required minimum distributions, or RMDs, from their retirement savings accounts. If they don’t, the IRS imposes steep 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 the firm’s own IRAs, Vanguard researchers found that nearly 7% of account holders forgot to take an RMD last year. The average missed RMD amount was $11,600, generating tax penalties of up to 25%, or $2,900 each.
Applying those figures nationally, Vanguard estimates that 585,000 IRA holders miss their RMDs annually, triggering collective tax penalties of up to $1.7 billion.
The firm’s findings also indicate that missed RMDs usually aren’t a one-off occurrence. Retirees who miss an RMD one year are very likely to miss it the next year, too.
“Most investors seem to make RMDs a routine,” Andy Reed, head of behavioral economics research at Vanguard, said in the report. “But rather than ‘set and forget,’ many simply 'forget and forget.’”
Previous research from the nonprofit Employee Benefits Research Institute found that between 15% and 18% of IRA holders failed to take RMDs in 2017.
IRAs aren’t the only accounts subject to mandatory distributions, either. Traditional employer-sponsored plans like 401(k)s and 403(b)s are, too (while Roth accounts are not). Employer-sponsdered plans weren’t included in Vanguard’s analysis, suggesting that collective tax penalties for missed RMDs likely amount to billions of dollars each year.
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What to do if you missed a required distribution
The Vanguard report says that RMDs are “mandatory in theory but voluntary in practice.” That leaves room for error — and potentially a big tax bill — because the distributions aren’t automated by default.
The convoluted 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 instance, if you turned 73 in 2024, your RMD deadline would have been April 1, 2025.
Every year after that, the RMD deadline is on Dec. 31. (Accurately calculating the amount you’re required to withdraw is a separate can of worms.)
For missing the deadline, the standard penalty is 25% of the missed RMD amount. However, there are ways to lower it.
If the mistake is timely corrected within two years and you file IRS Form 5329, the penalty can be reduced to 10%.
It’s possible the penalty can be fully waived if the missed distribution was “due to reasonable error and that reasonable steps are being taken to remedy the shortfall,” the IRS says. For a complete waiver request, you’ll need to file Form 5239 and send a letter of explanation to the IRS detailing the issue.
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