Many retirees are missing out on crucial funds in their retirement plans due to a simple mistake, failing to take their required minimum distributions (RMDs). This oversight is leading to billions of dollars in penalties annually.
As retirees work hard to secure their financial future, ensuring that their savings last throughout retirement is a top priority. Unfortunately, according to research, a common mistake is eroding the value of many retirement portfolios, costing Americans billions. The mistake? Missing required minimum distributions (RMDs), a critical aspect of retirement planning.
The Growing Issue of Missing RMDs
RMDs are mandatory withdrawals from certain retirement accounts, including traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. These distributions are required by the IRS once a person reaches a certain age, as the government wants to ensure that funds in these tax-deferred accounts are eventually taxed.
The rules surrounding RMDs have changed slightly over time, with the latest update under the SECURE 2.0 Act. According to Vanguard, retirees born between 1951 and 1959 must begin taking their RMDs at 73, while those born in 1960 or later must start at 75. Despite these clear guidelines, many seniors are still missing their RMDs, with potentially costly consequences.
Failure to withdraw the required amount results in a significant penalty, up to 25% of the missed distribution. However, this penalty can be reduced to 10% if the mistake is rectified within a set time frame, usually within two years. For many retirees, this penalty is avoidable but often overlooked. According to Vanguard’s research, almost 7% of traditional IRA investors missed their RMDs in 2024, leading to an average penalty of over $1,100 per person.
Why So Many Retirees Miss Their RMDs
There are several reasons why retirees miss RMDs. In many cases, it’s due to a lack of understanding about the rules, or the complex nature of these retirement accounts. With so many account options, retirement planners may find it difficult to track RMD obligations for each of their investments.
Another contributing factor is simply forgetting about the requirement. When retirement accounts are set up, the account holder may not realise that the IRS imposes such obligations once they reach a certain age.
The penalties for not taking the right amount at the right time can be steep. If an RMD is missed, the IRS levies a penalty of 25% on the amount that should have been withdrawn. For those who quickly fix the mistake, the penalty drops to 10%. Still, as Vanguard highlights, these fines add up, with American retirees collectively losing $1.7 billion a year to penalties on missed RMDs.
The key to avoiding RMD mistakes is proper planning and organisation. Retirees should make it a priority to fully understand the requirements surrounding RMDs and keep track of when withdrawals must be made. It’s important to review IRS tables and worksheets or work with an account provider to ensure the correct amount is withdrawn.
If you are unsure whether your withdrawals are in line with IRS requirements, it’s recommended to work with a financial advisor who can guide you through the process. Additionally, some retirees may consider converting their traditional IRAs to Roth IRAs, as Roth IRAs do not require RMDs. However, as with any financial decision, it’s essential to seek professional advice before making such a move, as it may have tax consequences.
