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It’s the season for last-minute shopping, family gatherings, and year-end financial tasks. But a new report says many Americans forget that last item or don’t do it correctly, often resulting in tax penalties and making similar mistakes in the future.
An analysis by Vanguard, a major asset management company, focuses on the required minimum distribution amount. Millions of Americans participate in retirement accounts like 401(k)s and IRAs, which allow participants to save money tax-free until later in life. As the name suggests, RMDs establish a minimum amount that must be withdrawn and taxed when the account holder reaches a certain age (73 for traditional IRAs and 401(k)s).
Nearly 7% of Vanguard customers with traditional IRA accounts with RMD requirements were unable to withdraw money from their Vanguard accounts in 2024. Meanwhile, another 24% had withdrawals too low to meet the requirements.
The 7% who didn’t take any RMDs could incur potential tax penalties ranging from $1,160 to $2,900, the analysis found.
Additionally, investors who successfully complete an RMD in one year are more likely to do the same the following year. However, 55% of investors who miss their RMD in one year will not receive any distributions the following year.
“Rather than ‘set it and forget it,’ many people simply ‘forget it and forget it,'” Andy Reid, director of behavioral economics research at Vanguard, said in the report.
Most investors who missed out on RMDs had balances of less than $5,000. Only 2.5% of investors with balances over $1 million did so.
With all this in mind, what can investors do to protect themselves? Vanguard notes that many IRA providers offer free automatic RMD services. Consolidating accounts can also simplify financial and retirement planning decisions, as smaller accounts are often overlooked during maintenance such as RMDs.
