Here’s a fun fact that’ll make you want to set seventeen calendar reminders: Nearly 600,000 Vanguard clients just got hit with tax penalties because they forgot to take money out of their own retirement accounts. Yes, you read that right. The IRS literally penalizes you for NOT spending your money.
Welcome to the wonderfully backwards world of Required Minimum Distributions (RMDs), where the government says “Hey, you’ve been saving responsibly for decades, but now we need our cut, so start withdrawing whether you want to or not.”
The numbers are pretty wild. Vanguard found that 6.7% of their RMD-eligible clients didn’t take any withdrawals in 2024. The average missed RMD? About $11,600. The penalty? A brutal 25% of whatever you were supposed to withdraw, though it can drop to 10% if you fix it quickly. So we’re talking $1,160 to $2,900 in completely avoidable penalties for the average person.
But here’s where it gets really interesting: it’s not just the folks with smaller accounts making this mistake. Sure, 56.8% of people with under $5,000 missed their RMDs (understandable – that’s like $200 they forgot about). But nearly 5% of people with $250,000 to $500,000 also whiffed on this. And for the millionaires? Their average penalty was $8,792. Ouch.
The psychology behind this is fascinating. Vanguard’s behavioral economics team (yes, that’s a real job and it sounds awesome) found that people who miss RMDs once are 55% likely to miss them again the next year. As researcher Andy Reed put it: rather than “set and forget,” many people just “forget and forget.” Brutal but accurate.
Think about it: you spend 40+ years being told to save, save, save for retirement. Then suddenly at 73 (or 70.5 if you’re older), the rules flip and you’re required to start withdrawing specific amounts based on complex life expectancy tables. It’s like spending decades learning to drive on the right side of the road, then being told you have to switch lanes every few miles.
The good news? The fixes are surprisingly simple. Vanguard suggests two main strategies:
First, automate everything. Most retirement account providers offer automatic RMD services. Set it once, and your money gets distributed on schedule without you having to remember anything. It’s like autopay for your retirement.
Second, consolidate your accounts. The average person changes jobs nine times during their career, which often means multiple 401(k)s and IRAs scattered across different companies. Each account has its own RMD requirement, which is a recipe for confusion. Roll them into one IRA, and you only have to track one distribution.
Look, retirement planning is complicated enough without the IRS adding arbitrary withdrawal deadlines. But since we’re stuck with these rules, might as well game them properly. Set up automation, consolidate accounts, and save yourself thousands in penalties.
Because the only thing worse than being forced to withdraw your own money is paying extra taxes for forgetting to do it.