Vanguard Reports Billions in Extra Taxes from Older Clients Skipping RMDs

A recent report from Vanguard reveals that many older investors are neglecting to take required minimum distributions (RMDs) from their retirement accounts. This oversight can lead to significant tax penalties, which can reach into the thousands of dollars based on account balances.

Understanding RMDs and Tax Penalties

The IRS mandates that individuals must start withdrawing money from retirement accounts once they reach a certain age. For those born before June 30, 1949, this age is 70.5 years. The amount required for each distribution varies, depending on account value and life expectancy.

Failure to take the required distributions results in hefty tax penalties. Specifically, the penalty is 25% of the RMD amount, although it may be reduced to 10% if the RMD is taken within two years following the deadline. In 2024, 585,000 clients of Vanguard with individual retirement accounts (IRAs) missed their RMD obligations.

Key Statistics from the Vanguard Report

• 6.7% of RMD-age clients did not withdraw funds in 2024.
• The average RMD amount was approximately $11,600.
• Potential tax penalties for missed RMDs ranged between $1,160 and $2,900, depending on the penalty rate.
• 24% of clients withdrew less than the required RMD amount.
• 69% successfully took withdrawals in compliance with RMD rules.
• 56.8% of investors with account balances under $5,000 did not meet their RMD requirements.
• Nearly 5% of those with savings between $250,000 and $500,000 also failed to comply.
• Average penalties for individuals with $1 million or more in their accounts were $8,792.

Trends and Recommendations

Vanguard’s findings suggest that individuals who fail to meet their RMDs are likely to make the same mistake in subsequent years. Approximately 55% of those who missed their distributions did so again the following year. Andy Reed from Vanguard emphasized the importance of consistent tracking of these distributions, stating that many investors tend to “forget and forget.”

To address this issue, Vanguard recommends several solutions:

• Automate distributions through the retirement account provider, if available.
• Consolidate multiple retirement accounts to simplify RMD management.

Aaron Goodman, a senior investment strategist at Vanguard, highlighted the challenges investors face due to frequent job changes, which can complicate tracking multiple retirement accounts. By combining IRAs and automating RMDs, investors can significantly reduce the risk of overlooking this important requirement.