Did you forget to take your Required Minimum Distributions (RMDs) late last year? You’re not alone.
Each year, nearly 7% — or 585,000 IRA holders — make that mistake, and that’s only at Vanguard. Many more retirees with traditional IRAs fail to take their RMDs every year.
The reasons why vary. For some, it's an oversight. For others, they don't even know what RMDs are, let alone when to take them. Generally, they start the year you turn 73, with your first RMD due by April 1 of the following year. After that, the deadline is December 31 annually.
Either way, it is costing retirees a lot of money in penalties. How much? Up to $1.7 billion a year at Vanguard alone, or between $1,160 and $2,900 per person based on the average annual RMD of $11,600. For those with a larger RMD, say, $19,000, the penalty for missing the deadline jumps to between $1,900 and $4,750. The more your RMD, the bigger the tax hit you face if you blow it off.
Don't forget the tax implications if you're forced to take several RMDs at once. Doubling up on distributions in a single year can easily push you into a higher income bracket, resulting in a significantly larger tax bill.
Why the big fee for missed RMDs?
The IRS imposes a 25% penalty for missing an RMD, which is much lower than the 50% it used to charge before the Secure Act 2.0 passed in 2023.
You can reduce the 25% penalty to 10% by withdrawing the overdue distributions within two years of the missed RMD and filing IRS Form 5329 showing you corrected the error.
If you can prove a "reasonable cause" for why you missed the RMD, the penalty may be waived entirely. Still, the better move is to stay on top of your annual withdrawals and avoid this altogether.
Even more worrisome, Vanguard's research showed that missing one RMD often leads to missing more. Among the self-directed IRA holders Vanguard analyzed, 55% of those who missed an RMD one year made the same mistake the following year.
“Most investors seem to make RMDs a routine, but rather than ‘set and forget,’ many simply 'forget and forget,'" said Andy Reed, head of behavioral economics research at Vanguard. “Reducing the rate of missed RMDs by even a modest amount could save investors hundreds of millions of dollars each year.”
Automate your RMD and never forget
There are ways to remember to take your annual RMD, and Reed argues the easiest is to automate the process. Sure, it requires a little effort upfront, but after that, you won't have to worry about it.
"Automating it takes memory out of the equation," said Reed, noting that more than one-third of Vanguard's self-directed IRA customers have automated RMDs. "Among those clients, the odds of missing RMDs is 0%. It's the most surefire way to avoid forgetting, to avoid penalties and avoid a surprise tax bill if you have to take a bunch of RMDs at once." At Vanguard and other plan sponsors, automating your RMDs is a free service.
If you aren't tech savvy, be on the lookout for reminders from your plan sponsor. IRA custodians are required to send RMD notices by January 31 of each year, while some providers send out a courtesy reminder letter in October.
Many providers will also send follow-up reminders throughout the year ahead of the December 31 deadline. Typically, you can find RMD amounts in your quarterly or year-end statements.
Just do it! RMDs are unavoidable
RMDs are like taxes; you can't avoid them, but if you forget to take them, they can be expensive — to the tune of $3,000 or more a year. The good news is that with a little foresight and preparation, you don’t have to take the hit.
Whether you automate the process or mark it on your calendar, staying on top of your RMDs is an easy way to keep more money in your pocket!
