A key year-end deadline is approaching for many investors, and missing it could result in an IRS penalty of up to 25%. However, experts say there are ways to reduce or even eliminate this penalty. Most retirees must start taking required minimum distributions (RMDs) from pretax accounts at age 73, with the first RMD due by April 1 of the year after turning 73, and future withdrawals must happen by December 31.<\/p>\n
The year-end RMD deadline also applies to certain heirs, including nonspouse beneficiaries such as adult children, with inherited individual retirement accounts. Since 2020, these heirs must empty inherited IRAs within 10 years, and they must start yearly RMDs in 2025 if the original IRA owner reached RMD age before their death. According to Aaron Goodman, a Vanguard senior investment strategist, “Missed RMDs are a billion-dollar mistake.”<\/p>\n
In 2024, some 6.7% of Vanguard investors at RMD age missed their yearly withdrawal, with an average RMD of $11,600, which could have incurred a maximum 25% penalty of $2,900. Vanguard estimated that there are about 8.7 million IRA owners at RMD age, and scaled with the 6.7% missed RMD rate from 2024, there could be more than 580,000 IRA owners skipping RMDs annually, with total penalties of up to about $1.7 billion per year.<\/p>\n
Experts say that changes in legislation and IRS guidance have made RMD rules more confusing, and errors can be costly. However, if you don’t take your full RMD by December 31, the IRS penalty is 25% of the amount you should have withdrawn, which could be dropped to 10% if the RMD is “timely corrected” within two years, and you file Form 5329, according to the IRS.<\/p>\n
In some cases, the agency could waive the 25% or 10% penalty completely if your RMD shortfall happened due to “reasonable error” and you’ve taken “reasonable steps” to correct the mistake, according to the agency. Sham Ganglani, retirement distributions leader at Fidelity, advises that if you miss the December 31 deadline, you should take your RMD “as fast as you possibly can,” as the IRS seems to be willing to work with you when you are doing the right thing.<\/p>\n