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Many Vanguard clients in their 70s and older failed to take minimum distributions from retirement accounts in 2024.
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Missing an RMD may result in a tax penalty of 10% to 25% of the required amount.
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Vanguard recommends automating withdrawals and consolidating accounts to avoid missing RMDs.
A new report from Vanguard Group shows that large numbers of older, retirement-age investors are failing to receive required minimum distributions (RMDs).
This ultimately results in tax penalties that can amount to thousands of dollars, depending on the account value.
The IRS requires that once investors reach a certain age (for example, age 70.5 for investors born before June 31, 1949), they must begin taking required distributions from retirement accounts. Distribution amounts vary, depending on the amount in your account and your and your spouse’s life expectancy.
Failure to accept an RMD will result in a tax penalty of 25% of the RMD amount. If the RMD is made within a few years of the original closing date, it can sometimes be reduced to 10%.
In 2024 alone, 585,000 Vanguard customers with individual retirement accounts (IRAs) failed to collect RMDs.
“We found that 6.7% of RMD-age customers did not take any withdrawals in 2024. Among these customers, the average RMD amount was $11,600, with potential tax penalties ranging from $1,160 to $2,900 (penalty rates of 10% and 25%, respectively),” the report states.
It continued: “An additional 24% of customers will withdraw amounts below the RMD threshold in 2024, while 69% will withdraw amounts at or above the RMD level.”
Investors with smaller balances are more likely than wealthy investors to miss the RMD deadline, with 56.8% of investors with account balances below $5,000 not meeting withdrawal requirements.
Still, nearly 5% of investors with savings between $250,000 and $500,000 fell short of their requirements.
Of course, the penalties are highest for those with more money. For people with at least $1 million in their accounts, the average fine was $8,792.
Vanguard says those who miss a release are more likely to miss one in the following years – 55% of people who miss a release miss one again in the next year.
As Andy Reed, director of behavioral economics research at Vanguard Group, wrote in the report: “Many people are not ‘set and forget’ but ‘set and forget.'”
The company recommends several solutions to reduce the number of investors who do not comply with RMD rules.
One is to make an automatic distribution with your retirement account provider (if they offer such services). Another option is, if you have multiple retirement accounts, to consolidate them so you only have to remember one allocation.