Forgot an IRA Withdrawal? The Mistake Is Costing Investors Billions.

Nearly 7% of Vanguard’s IRA investors age 73 and up fail to take required annual withdrawals, triggering costly tax penalties. (Dreamstime)

Key Points

• Vanguard estimates that investors face up to $1.7 billion annually in tax penalties for not taking required minimum distributions (RMDs).
• In 2024, 6.7% of Vanguard’s IRA holders aged 73 and older missed their RMDs, with an average missed amount of $11,600.
• Most investors missing RMDs are self-directed with small balances, but 2.5% with over $1 million face average penalties of $8,800.

Investors who forget to take required minimum distributions from their retirement accounts after they turn 73 face tax penalties that, nationally, amount to as much as $1.7 billion a year, according to Vanguard.

Vanguard researchers found that 6.7% of the firm’s individual retirement account holders age 73 and up had missed taking their RMDs in 2024.

These distributions—from traditional IRAs and traditional 401(k) plans—“are mandatory in theory but voluntary in practice, and many investors fail to take them,” Vanguard said in research published earlier this month.

The average RMD amount Vanguard clients were required to take last year but didn’t was $11,600. Failing to take those funds out of their retirement accounts would generate a potential tax penalty between $1,160 and $2,900, based on penalty rates of 10% and 25%, respectively, Vanguard said.

Extrapolating these findings to the 8.7 million IRA investors nationwide who are required to take RMDs, Vanguard estimates that 585,000 individuals would owe aggregate tax penalties ranging from $678 million to $1.7 billion each year.

“Reducing the rate of missed RMDs by even a modest amount could save investors hundreds of millions of dollars each year,” Andy Reed, Vanguard’s head of behavioral economics research, said in an article about the research.

Reed and Aaron Goodman, a senior investment strategist at Vanguard and leader of its research team, decided to look at missed RMD payments after earlier research they conducted of younger IRA holders revealed many who roll over retirement account funds to an IRA when they change jobs forget to invest the funds, Goodman said in an interview.

The researchers had a suspicion that “the same lack of awareness might lead people to miss RMDs,” he said.

In fact, a much earlier study by the Employee Benefit Research Institute found that in 2017, between 15% and 18% of IRA investors failed to take their mandatory withdrawals.

RMDs must be taken by Dec. 31 each year, although those who are taking a distribution for the first time have until April 1 of the following year, Vanguard said. According to the Internal Revenue Service, the RMD is calculated by dividing the prior Dec. 31 balance on an account by a life expectancy factor determined by the IRS.

The personal investing site NerdWallet has an RMD calculator that can also guide investors on how much to take out.

The majority of those who failed to take their required distributions—56.8%—were self-directed investors with less than $5,000 in their accounts. Their average tax penalty would only be about $4. But the 2.5% with balances of more than $1 million would pay nearly $8,800, on average, Vanguard said.

The investment firm also found that forgetting to take a distribution once often means forgetting again the following year. In 2024, 55% of investors who missed taking a distribution in 2023 didn’t take one the following year either. “Rather than ‘set and forget,’ many simply ‘forget and forget,’” Reed said.

The fact most investors who forget to withdraw funds from their IRAs are self-directed with lower balances makes sense, said Kate Ashford, an investing specialist at NerdWallet.

“They’re not working with a financial professional who can watch out for pitfalls like missing your RMD,” Ashford said in an email.

Vanguard and other IRA providers offer automated services that ensure investors don’t skip distributions. The fact that closer to 7% of Vanguard IRA holders failed to take RMDs instead of 15% or more, as EBRI found, may reflect that about a third of the firm’s clients use its auto-RMD service, Goodman says. “That’s probably the best way to make sure this gets done every year.”

Automated services can simplify things, Ashford agreed, “but keep in mind that you may want to take more or less each year depending on your income needs.”

She also recommended investors with several retirement accounts consolidate them so the RMD is easier to calculate and manage.

“Another approach is to incorporate RMDs into your retirement budget and set up regular withdrawals to cover your required amount—almost like a paycheck,” she said. “If you’re using your RMD for daily expenses, it won’t slip your mind.”

Write to Abby Schultz at abby.schultz@barrons.com