Among the marquee reasons why retirees should work with advisors are the various retirement account withdrawal rules and regulations that can easily trip up of novices, creating costly penalties along the way.
Take the case of required minimum distributions (RMDs), which can be minefields for many retirees to navigate on their own. In theory, the RMD process isn’t complex. Investors 73 and older with individual retirement accounts (IRAs) and 401(k) plans have to take a RMD by the end of the year. For those taking their first RMD, the deadline is April 1 of the following year.
Said differently, RMDs are deadline-intensive, confirming it’s nice to have a reminder. Advisors can oblige on that front and that’s something for retirees to consider because each failure to comply with RMDs can result in an IRS penalty of $1,100 or more. Read on to discover why this is significant.
Heed Vanguard’s Warnings
Vanguard notes that in 2024, 6.7% of its RMD-age clients didn’t take any distributions, resulting in average tax tab of $1,100. Extrapolate that over that 6.7% and the collective client gaffe was a staggering $1.7 billion.
“Among these clients, the average RMD amount was $11,600, generating a potential tax penalty of between $1,160 and $2,900 (at penalty rates of 10% and 25%, respectively),” notes the asset manager. “Another 24% of clients took a withdrawal in 2024 that was below the RMD threshold, while 69% took a withdrawal at or above the RMD level.”
Importantly, the Vanguard study only pertains to that firms clients, implying that $1.7 billion in penalties by way of not taking RMDs is a figure that at a minimum is a ballpark approximation of what’s going on with RMD-aged clients with accounts at firms of comparable size and scale to Vanguard. Translation: Missed RMDs are indeed a multi-billion dollar problem in this country.
“There are roughly 8.7 million RMD-age IRA holders nationwide,” adds Vanguard. “Scaling our missed-RMD rate of 6.7% and applying our average tax penalty of $1,160–$2,900, we estimate that 585,000 IRA holders miss their RMDs annually, with the total potential tax penalties ranging from $678 million to $1.7 billion each year.”
Factors for Advisors to Consider
A one-off penalty of $1,100 doesn’t sound like a lot, but if that pattern repeats, it’s possible for a client to jeopardize their retirement security by having to throw money to the IRS – capital that would be better used in client portfolios.
Unfortunately, and this is something for advisors to be mindful of, those patterns repeat and the missed RMD trend is most apparent among retirees with smaller account balances. Vanguard says just 2.5% of its RMD-aged clients with account balances of $1 million or more missed the related deadlines, but that percentage more than triples for those with account balances of $50,000 to $100,000.
“RMD behavior tends to carry over from year to year. The majority of investors (55%) who miss an RMD in one year also miss their RMD in the following year, while only 3% of those who take RMDs in one year miss them the next year,” concludes the asset manager.
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