How costly are missed RMDs?

“Missed RMDs are a billion-dollar mistake,” said Aaron Goodman, a Vanguard senior investment strategist and leader of the research team. “We’ve already seen automated solutions improve other investor outcomes, and taking a similar approach to RMDs could help eliminate unnecessary tax penalties.”

Investors age 73 and older with traditional IRAs and traditional 401(k) plans must take RMDs each year or else incur a tax penalty. These distributions are mandatory in theory but voluntary in practice, and many investors fail to take them. (RMDs must be taken by December 31 every year, but investors taking their first RMD have until April 1 of the following year.)

Our research focused on Vanguard clients with traditional IRAs. We found that 6.7% of RMD-age clients did not take any withdrawal in 2024. Among these clients, the average RMD amount was $11,600, generating a potential tax penalty of between $1,160 and $2,900 (at penalty rates of 10% and 25%, respectively). Another 24% of clients took a withdrawal in 2024 that was below the RMD threshold, while 69% took a withdrawal at or above the RMD level.

An important limitation of our analysis is that we only consider Vanguard IRA accounts. It is possible that some clients who withdrew less than required in their Vanguard IRAs still complied with RMD rules by taking additional withdrawals from non-Vanguard IRAs. We base our estimates of aggregate tax penalties on the 6.7% of clients who did not take any withdrawal in 2024, since these “complete” misses are more likely to indicate persistent RMD errors across IRA providers.

There are roughly 8.7 million RMD-age IRA holders nationwide. Scaling our missed-RMD rate of 6.7% and applying our average tax penalty of $1,160–$2,900, we estimate that 585,000 IRA holders miss their RMDs annually, with the total potential 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,” said Andy Reed, Vanguard head of behavioral economics research. 

The majority of investors (56.8%) with balances under $5,000 missed their RMD in 2024, while only 2.5% of investors with balances over $1 million did.

“Missed RMDs are more common for some investors and more costly for others,” said Goodman. Self-directed investors are three times more likely to miss RMDs than advised investors. However, neither age nor gender predicted the likelihood of missed RMDs.

RMD behavior tends to carry over from year to year. The majority of investors (55%) who miss an RMD in one year also miss their RMD in the following year, while only 3% of those who take RMDs in one year miss them the next year.

“Most investors seem to make RMDs a routine,” said Reed, “but rather than ‘set and forget,’ many simply 'forget and forget.'"

One of the best ways for investors to ensure they take their RMDs is to use auto-RMD services, which are usually offered for free by IRA providers, including Vanguard. Financial advice can provide auto-RMD services and tailor the amount and timing of the distribution to meet investor preferences. Finally, consolidating smaller accounts may make it easier to avoid forgetting RMDs from “small pots” and simplify retirement income decisions.

“With investors changing jobs nine times or more in their working careers, it’s tough to keep tabs on all retirement accounts,” said Goodman. “Combining IRAs and putting RMDs on autopilot takes forgetting out of the equation.”