January 04: RMD Misses Put Up to $1.7B at Risk, Vanguard Warns
RMD penalties are back in focus after the Dec. 31 cutoff. Vanguard says 6.7% of required minimum distribution clients missed 2024 withdrawals, putting up to $1.7 billion at risk. The IRS charges 25% on the shortfall, but timely fixes can cut that to 10% by filing Form 5329. With age 73 RMD rules in effect, we show who must take distributions, how to correct a miss right away, and ways to avoid another costly mistake.
What the misses mean for retirees
Vanguard reports that 6.7% of IRA clients at RMD age failed to take 2024 withdrawals, exposing retirees to steep RMD penalties. That error could total up to $1.7 billion each year, based on its client base and IRS rules. The excise tax is 25% of the shortfall. Correcting quickly and filing Form 5329 can reduce the hit to 10% source.
The penalty applies to the amount you should have taken but did not. If your missed required minimum distribution was $20,000, the excise tax is $5,000 at 25%. Fix it within the correction window and file Form 5329 to lower it to $2,000 at 10%. Interest and other tax may apply if you delay further.
Who must take distributions and when
Most traditional IRA, SEP, and SIMPLE IRA owners must start at age 73. Your first required minimum distribution is for the year you reach 73. You may delay that first payment to April 1 of the next year, but then you will likely owe two distributions in that next tax year, which can raise your taxable income.
For most years after your first, the deadline is Dec. 31. The IRS “correction window” for missed payouts runs until the end of the second tax year after the failure, unless the IRS assesses earlier. That timing lets many filers reduce RMD penalties to 10% if they take the shortfall now and submit Form 5329 promptly.
How to fix a missed withdrawal now
First, calculate the shortfall and take that amount as soon as possible. Second, complete Form 5329 to report the missed required minimum distribution and claim the 10% rate under timely correction. Third, include a brief explanation if you seek relief. These actions can sharply reduce costs source.
Ask your custodian for a 1099-R showing the make-up distribution. Consider federal withholding to avoid underpayment surprises. If you have multiple IRAs, you can usually total the RMDs and take the amount from one account. Employer plans like a 401(k) generally must be satisfied separately. Keep records with your Form 5329 filing.
Ways to avoid another miss
Set automatic withdrawals for late fall to allow time for fixes before year end. Add a calendar reminder for October and verify your amount with your custodian. If you turned 73 this year, plan for two payments if you delay your first one to April 1. Review beneficiaries and contact details to ensure timely notices.
Qualified charitable distributions from IRAs can count toward your required minimum distribution for eligible donors and may reduce taxable income. In-kind transfers of securities also satisfy the rule if your custodian supports them. Recheck your RMD each year because account balances and divisors change. Confirm plan-specific rules before moving funds.
Final Thoughts
Missing a required minimum distribution can be costly, but quick action can contain the damage. Vanguard’s data shows how common the mistake is, and the IRS rules are clear. Take the shortfall now, then file Form 5329 to pursue the reduced 10% excise tax within the correction window. Confirm whether multiple IRAs can be aggregated and handle any employer plan separately. Going forward, automate payouts, set reminders, and revisit amounts each fall. If you are 73 this year, decide whether to take the first payment this year or by April 1 next year, while planning for the possible second distribution in that year. Small steps today can prevent large RMD penalties later.
FAQs
The IRS assesses a 25% excise tax on the amount you failed to withdraw. If you correct the shortfall within the correction window and file Form 5329, that penalty can be reduced to 10%. Act quickly, document the missed amount, and keep proof of the make-up distribution with your tax records.
Yes. You may delay your first required minimum distribution until April 1 of the following year. If you do, you will also need to take that year’s regular distribution by December 31, which means two payments in the same calendar year. Consider the tax impact before choosing to delay.
Take the missed amount as soon as possible, then file Form 5329 with your tax return to report the shortfall and claim the 10% rate under timely correction. Attach a brief explanation if you seek relief. Keep distribution confirmations and custodian statements with your records for support.
Roth IRAs do not require lifetime distributions for the original owner, so there is no RMD penalty risk while you are alive. Beneficiaries of inherited Roth IRAs may have distribution requirements. Traditional, SEP, and SIMPLE IRAs, and most employer plans, do require distributions once you reach the applicable age.
Disclaimer:
The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.
