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Vanguard just answered a question I’ve long had — and it’s a question only someone who lives and breathes retirement income planning, like me, would have: What percentage of people miss their required minimum distributions (RMDs) entirely or take less than the minimum amount?
The answer, according to Vanguard, is that about 7% of people who are required to take RMDs take less than the legally required amount. The Employee Benefit Research Institute (EBRI) miss rate was about three times that.
The penalty for the missed amount is 25%. Lowered from a truly punitive 50% as part of the SECURE 2.0 Act passed in 2022, the price for missing RMDs is still a mystery for most taxpayers.
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Let me help. If you had $1 million in one of your retirement accounts as of December 31 and failed to take the RMD this year of $40,000, the penalty would be $10,000.
Here’s my best advice on how you can keep yourself out of the IRS penalty box.
1. Learn the rules
In 2016, Social Security rules changed in an attempt to close unintended loopholes. The result was several rule sets, based on marital status and birth year. The system, which was already quite complex, became even more so.
The same thing has happened with RMDs with the advent of SECURE 1.0 and SECURE 2.0. There is now an if-this-then-that-style decision tree to figure out whether you need to take an RMD and, if so, how much.
For example, I’ve got a retired client whose situation is fairly straightforward. He’s married and has some self-employment income. He’s got three RMDs every year. Two are IRAs, which can be aggregated for RMD purposes (more on that later), and the third is from a solo 401(k) which has contributions.
While the IRAs can be aggregated, one is an annuity with an income rider, which has a different calculation for how much must be taken. He also makes qualified charitable distributions (QCDs), which reduce the aggregate IRA RMD dollar-for-dollar.
Every year as I’m doing these calculations, I wonder how many people are getting this right — and even how many advisers are ill-equipped to do this work.
Many custodians now have good resources that can tell you whether you need to take an RMD from your own account. Most of that answer is just based on your date of birth (DOB).
However, many of the same custodians will hedge on whether you need to take an RMD from your inherited IRA. As of 2025, most people with inherited IRAs do need to take an annual RMD, but that depends largely on the decedent’s DOB and date of death (DOD).
Don’t worry — the next three aren’t nearly as complicated.
2. Consolidate
The Vanguard research also highlights that most missed RMDs are from small accounts. My guess is that this is occurring for two reasons: Either the account owners don’t have access to professional resources and don’t know they need to take RMDs, or they forgot about the account entirely.
One of the first things we do when we are considering bringing on a new client is build out a financial plan. First, we build a balance sheet. The software we use makes it clear when there are too many retirement accounts, which is probably the leading cause of missing RMDs. (There’s a free version of that software if you want to try it.)
As noted above, the IRS allows you to aggregate RMDs for IRAs but not for employer plans. If you have six 401(k)s and one IRA, you have to take seven separate RMDs. If you have six IRAs and one 401(k), you have to take only two.
The first situation leaves a lot more room for error. I am a fan of simplicity when it comes to accounts and institutions. I will almost always recommend having as few accounts as is necessary to reach your goals (and to avoid these pesky distributions).
While I am mostly highlighting the benefits of consolidating old employer plans into IRAs, it doesn’t always make sense. Here’s a situation we run into where the opposite may be best.
Let’s say you’re still working as an employee past your RMD age. The IRS does not require you to take an RMD from your current employer plan. You may be able to roll your other retirement plans into your current plan to avoid those RMDs, too.
3. Automate
Almost all of the major custodians I have worked with have a way to automate RMDs. While we do not use this option for any of our clients for the accounts we manage, we do often recommend it for those outside of our purview.
Automating can almost guarantee you won’t miss the distribution but also requires giving up some element of control.
In an IRA, you’ll have to make sure there is cash in the account to make the distribution. That’s cash that cannot be invested.
If it’s an employer plan, it’s likely that it will create cash by selling the funds on a pro-rated basis. In other words, if you have 60% in a stock fund and 40% in a bond fund and you need $10,000, your plan will sell $6,000 from the stock fund and $4,000 from the bond fund.
On the surface that looks like a good idea, but in negative years in the market, you’d probably want to sell it all from the bond fund. In positive years, just the opposite.
In conclusion, I like the idea of automating these distributions from small, old accounts. I’d rather retain control in more consequential buckets.
4. Beg for forgiveness
Let’s say you fall into the group who missed the RMD. Now what? Like most things, the IRS has a form for that. My experience is that the IRS has been very forgiving with taxpayers. The most important thing is that you correct it.
If you missed the RMD, take it now. You’ll have to file Form 5329 with your return, with a brief explanation of why you missed it. Like most things with the IRS, no news is good news. Take your RMD, file the form and hope you never have to discuss it again.
