Vanguard: 1 in 3 retirees faces an RMD tax penalty

For many financial advisors, the required minimum distribution (RMD) is often treated as a minor, once-a-year administrative task. But for roughly 1 in 3 RMD-age clients who either missed a distribution or withdrew too little, that oversight can turn into a costly mistake come tax time, Vanguard research shows.

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Analyzing roughly 400,000 RMD-age clients with Vanguard traditional IRA balances of at least $5,000, researchers found that 6.7% failed to take a required distribution in 2024 (the most recent data available), while another 24% withdrew less than their full RMD. With the average missed RMD hovering around $11,600, the typical client can face penalties of up to $2,900.

Less-affluent investors are more likely to miss RMDs than wealthier clients, though the issue cuts across all investor levels. About 2.5% of clients with IRA balances above $1 million missed their RMDs in 2024. While such lapses are less common among high-balance clients, they tend to be far more expensive when they occur: The average tax penalty for those with $1 million-plus accounts was just under $8,800.

Researchers say these errors are also “sticky,” with 55% of investors who miss an RMD in one year going on to miss it the following year.

“Most investors seem to make RMDs a routine, but rather than ‘set and forget,’ many simply ‘forget and forget,'” said Andy Reed, head of behavioral economics research at Vanguard.

According to Vanguard research, helping clients meet their RMDs is a key value-add for financial advisors. Self-directed investors are three times more likely to miss RMDs than those who work with an advisor. And for many clients, the cost of a single penalty could equal a substantial portion of an annual advisory fee.

Advisors say the simplest way to avoid tax penalties is to make sure clients take their full required minimum distribution in the first place. But even if an advisor finds that a client did not take the required RMD in 2025, there are a few crucial steps they can take to reduce or even eliminate the tax penalty.

A waiver for ‘reasonable cause’

If a client finds they’ve missed an RMD in the previous year, speed and documentation are paramount, according to Joon Um, a tax advisor and CFP at Secure Tax & Accounting in Beverly Hills, California.

“Missing an RMD is stressful, but it’s not the end of the world and is usually fixable if handled quickly,” Um said. “What we tell clients to do first is take the missed distribution as soon as possible. In many cases, the IRS will waive or reduce the penalty, especially if it’s a first-time mistake or due to confusion or custodian error.”

To request forgiveness from the IRS, advisors can use IRS Form 5329, which is used to report and pay additional taxes on certain retirement account transactions, to request a reasonable-cause waiver for a missed RMD. This form is the official way to ask the IRS to forgive the penalty.

Advisors say providing clear documentation is crucial when submitting the request. Detailed records help demonstrate the reason the distribution was missed and increase the likelihood that the IRS will grant relief.

“If implementation or reporting falls outside my role, I advise clients to work directly with their accountant to ensure the penalty is properly addressed and integrated into their tax filing,” said Joe Piszczor, founder of Washington Family Wealth in Washington, Pennsylvania.

Simplify the footprint

Beyond the current tax year, one of the most effective ways to reduce RMD risk is to consolidate accounts, minimizing the chances that an account is overlooked.

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

Advisors can also simplify the process by withdrawing a client’s total RMD from a single account, even while maintaining multiple retirement accounts, according to Gregory Guenther, managing director at GRANTvest Financial Group in Matawan, New Jersey.

Additionally, advisors can use qualified charitable distributions (QCDs) to help clients satisfy the RMD while lowering their taxable income, provided the coordination happens well before the December deadline, Guenther said.

“RMD penalties are rarely a tax problem,” Guenther said. “They are almost always a planning problem. When advisors, clients and accountants are aligned early, penalties are typically avoidable, and when they do occur, they are often fixable.”