This RMD mistake costs investors up to $1.7 billion annually
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An important year-end deadline is approaching for many investors, and missing it could trigger a penalty of up to 25% from the IRS. But experts say there is a way to reduce or even eliminate it.
Most retirees need to start the so-called required minimum distributionsor RMDs from pre-tax accounts at age 73. The first RMD must be paid by April 1 of the year after you turn 73, and future withdrawals must be made by December 31. Your RMD is based on your balance, your age, and an IRSlife expectancy factor“
The year-end RMD deadline also applies to certain heirs, including non-spousal beneficiaries such as adult children who inherit individual retirement accounts. Since 2020, these heirs must empty the inherited IRAs within 10 years. They must begin annual RMDs in 2025 if the original IRA owner reaches RMD age before their death.
But changes in legislation and IRS guidance have made RMD rules more confusing, and mistakes can be costly, experts say.
“Missed RMDs are a billion-dollar mistake,” says Aaron Goodman, senior investment strategist at Vanguard and leader of the research team. said in a report It was launched by the company earlier this month.
According to the report, in 2024, approximately 6.7% of Vanguard investors of RMD age missed their annual withdrawals.
The average RMD among these investors was $11,600, which could be subject to a maximum 25% penalty of $2,900, the report said. However, some investors may have met their RMD requirements through non-Vanguard accounts.
Vanguard estimates there are approximately 8.7 million IRA owners of RMD age. When scaled to a 6.7% missed RMD rate in 2024, more than 580,000 IRA holders annually could skip RMDs and face total penalties of up to approximately $1.7 billion annually, the company estimates.
How to reduce or eliminate the IRS penalty
If you don’t take your full RMD by December 31, the IRS penalty is 25% of the amount you must withdraw.
However, if the RMD is “timely corrected” within two years, that rate may drop to 10% and you’ll be able to file. Form 5329According to the IRS.
In some cases, the agency may waive the 25% or 10% penalty altogether if your RMD deficiency was caused by “reasonable error” and you took “reasonable steps” to correct the error, according to the agency.
Either way, if you miss the Dec. 31 deadline, you should take your RMD “as quickly as possible,” Sham Ganglani, Fidelity’s retirement distribution leader, previously told CNBC. “[The IRS] “He seems willing to work with you when you do the right thing,” he said.
