D3sign | Moment | Getty Images
A key year-end deadline is here for many investors — and skipping it could trigger an IRS penalty of up to 25%. But there’s a way to reduce or even eliminate it, experts say.
Most retirees must start so-called required minimum distributions, or RMDs, from pretax accounts at age 73. The first RMD is due by April 1 of the year after turning 73, and future withdrawals must happen by Dec. 31. Your RMD is based on your balances, age and an IRS “life expectancy factor.”
The year-end RMD deadline also applies to certain heirs, including non-spouse beneficiaries such as adult children, with inherited individual retirement accounts. Since 2020, these heirs must empty inherited IRAs within 10 years. They must start yearly RMDs in 2025 if the original IRA owner reached RMD age before their death.
However, experts say that changes in legislation and IRS guidance have made RMD rules more confusing — and errors can be costly.
“Missed RMDs are a billion-dollar mistake,” Aaron Goodman, a Vanguard senior investment strategist and leader of the research team, said in a report released by the company earlier this month.
In 2024, some 6.7% of Vanguard investors at RMD age missed their yearly withdrawal, according to the report.
Among those investors, the average RMD was $11,600, which could have incurred a maximum 25% penalty of $2,900, the report found. But some investors may have met RMD requirements via non-Vanguard accounts.
Vanguard estimated there are about 8.7 million IRA owners at RMD age. 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, the company estimated.
How to reduce or eliminate the IRS penalty
If you don’t take your full RMD by Dec. 31, the IRS penalty is 25% of the amount you should have withdrawn.
However, that could be dropped to 10% if the RMD is “timely corrected” within two years, and you file Form 5329, according to the IRS.
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.
Either way, if you miss the Dec. 31 deadline, you should take your RMD “as fast as you possibly can,” Sham Ganglani, retirement distributions leader at Fidelity, previously told CNBC. “[The IRS] seems to be willing to work with you when you are doing the right thing,” he said.