- Many Vanguard clients in their 70s and above missed required minimum distributions from retirement accounts in 2024.
- Missing RMDs can lead to tax penalties of between 10% and 25% the required amount.
- Vanguard suggests automating withdrawals and consolidating accounts to avoid missed RMDs.
A substantial number of elderly, retirement-age investors are failing to take required minimum distributions, or RMDs, a new Vanguard report shows.
This ultimately results in tax penalties, which can amount to thousands of dollars, depending on the account values.
IRS rules stipulate that once investors reach a certain age — for example, 70.5 for those born before June 31, 1949 — they must start taking a required distribution from their retirement accounts. Distribution amounts vary and depend on how much you have in the account and your and potentially your spouse's life expectancies.
Not taking RMDs results in a 25% tax penalty on the RMD amount. That can sometimes be reduced to 10% if the RMD is taken within a couple of years after the original deadline.
In 2024 alone, 585,000 of the Vanguard's clients with individual retirement accounts, or IRAs, failed to take RMDs.
"We 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)," the report said.
It continued: "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."
Investors with smaller balances tend to miss RMD deadlines more than wealthier investors, with 56.8% of investors with an account balance under $5,000 not meeting withdrawal requirements.
Still, almost 5% of investors with savings between $250,000 and $500,000 did not hit their requirements.
Naturally, penalties are highest for those with more money. Average penalties for those with at least $1 million in their accounts were $8,792.
Vanguard
Vanguard said that those who miss distributions are more likely to miss them in following years — 55% who missed them did so again the next year.
As Andy Reed, Vanguard's head of behavioral economics research, wrote in the report: "rather than 'set and forget,' many simply 'forget and forget.'"
The firm recommended a couple solutions to reduce the number of investors not complying with RMD rules.
One is to automate distributions with your retirement account provider, if they offer such a service. Another is to combine retirement accounts if you have more than one, so that you only have to remember a single distribution.
"With investors changing jobs nine times or more in their working careers, it's tough to keep tabs on all retirement accounts," wrote Aaron Goodman, a senior investment strategist at Vanguard. "Combining IRAs and putting RMDs on autopilot takes forgetting out of the equation."
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