Required Minimum Distributions: A Potential Billion-Dollar Oversight

According to Vanguard’s latest research, failing to take required minimum distributions (RMDs) isn’t just a retirement planning oversight; it’s a costly mistake that impacts retirement savers each year.[i] Vanguard found that nearly 7 percent of RMD-eligible participants missed their full RMD in 2024, resulting in average potential penalties of $1,100–$2,900 per investor and a national estimate of up to $1.7 billion in penalties collectively. For plan sponsors, this issue sits at the intersection of compliance, participant outcomes and fiduciary governance. Even though the ultimate responsibility belongs to the participant to satisfy their RMD, repeated RMD failures raise questions about whether plan communications, recordkeeper processes, and participant education are truly effective.

Here’s What You Really Need to Know

• A minimum amount of participant’s tax-deferred retirement savings (both pre-tax and employer contributions, as well as earnings) must be withdrawn (and taxed), beginning at age 73 (for most). A few exceptions apply.
• There are significant penalties for not withdrawing the proper amount, although these were lessened by SECURE 2.0.
• While the participant is responsible for the calculation of the proper RMD amounts, taking their RMD, and paying any applicable penalties, plan sponsors have a duty to establish procedures to ensure that the RMD rules are followed to keep the plan in compliance.

Let’s Dive In

What are RMDs and Why Do They Exist?

Required minimum distributions are mandatory annual withdrawals from tax-deferred retirement accounts such as IRAs and most employer-sponsored retirement plans including 401(k), 403(b), 401(a) and governmental 457(b) plans. The policy rationale is straightforward: Congress allowed tax deferral to encourage retirement saving, but it never intended for those dollars to remain untaxed indefinitely. RMD rules are designed to ensure that these savings are eventually distributed and taxed over the participant’s lifetime.

When Must RMDs Occur?

The starting age for RMDs has changed multiple times in recent years, contributing to widespread confusion.

• Pre-SECURE: RMDs began at age 70½.
• SECURE Act (2019): Raised to age 72.
• SECURE 2.0 (2022): Increased to 73 (and eventually 75 for those born after 1960), with reduced penalties, and allowed more correction flexibility.
• Roth Accounts: RMDs have historically applied to Roth 401(k)s and Roth 403(b)s, but recent changes eliminated RMDs for Roth IRAs, allowing continued tax-free growth.

RMDs must be taken annually beginning at the applicable RMD age; however, a different deadline applies in the first year that a RMD is required.

• Initial RMD: Generally due by April 1 of the year following a participant reaching their required beginning age (currently 73 for most individuals)
• Subsequent RMDs: Annually thereafter and must be taken by December 31 each year.

A critical (and often misunderstood) nuance is that delaying the first RMD until April 1 means the participant must take two taxable distributions in the same calendar year — the delayed initial RMD and the current year RMD by December 31. That “double income” effect can push retirees into higher tax brackets, trigger Medicare premium surcharges or reduce eligibility for certain credits.

SECURE 2.0 further complicates the picture by pushing the RMD age to 75 for individuals born after 1960, creating a long transition period where different cohorts follow different rules.

Once an individual reaches the required age, there are very few exceptions to taking RMDs. The primary exception is the ‘still-working’ rule, which allows participants to defer RMDs from their current employer’s plan until they separate from service, provided they remain actively employed. This exception applies only to the current employer’s plan, not to IRAs or previous employers’ plans, and is unavailable to anyone who owned 5 percent or more of the company during the determination year (the year they reach RMD age). Additionally, the plan document must specifically allow this exception to apply.

How Much is the RMD and What Kind of Errors Occur?

RMD amounts are calculated using actuarial life expectancy tables published by the Internal Revenue Service (IRS). In theory, these tables spread withdrawals over the remaining expected lifespan of the participant. In practice, the calculations can feel opaque and intimidating to retirees, especially those managing multiple accounts.

RMD calculations rely on two primary inputs:

1. Year-end account balance (as of December 31 of the prior year)
2. Applicable life expectancy factor from the IRS Uniform Lifetime Table[ii]

To calculate the amount that must be withdrawn from the retirement account, the first input is multiplied by the second.

Participants often overlook smaller or dormant accounts; however, RMDs apply to all tax-deferred accounts. For participants who have multiple accounts across various recordkeepers, all accounts should be considered when calculating the proper RMD amount. Participants should ensure they are using the most current life expectancy table, as it is periodically updated by the IRS.

While many recordkeepers calculate and provide estimated RMD amounts, these figures are only as accurate as the underlying data, and participants may not realize that responsibility for verification of the calculation rests with them.

What Happens if You Miss or Miscalculate the RMD?

Historically, missing an RMD triggered one of the harshest penalties in the Internal Revenue Code: a 50 percent excise tax on the amount not withdrawn. However, SECURE 2.0 significantly softened this penalty, and the standard penalty is now 25 percent of the amount not withdrawn, but it can be reduced to 10 percent if the error is corrected within two years and the participant files IRS Form 5329 with an explanation. Vanguard’s estimate of $1,100–$2,900 in average penalties understates the actual cost once potential advisory and tax preparation fees are considered.

Who is Ultimately Responsible for the RMD?

Under IRS rules, the individual account owner (or plan participant) is ultimately responsible for ensuring their RMDs are taken on time and in the correct amount. Custodians and recordkeepers often calculate suggested RMD amounts and provide notices to participants, but they do not bear regulatory responsibility for compliance — the Internal Revenue Code places that responsibility on the participant and the plan sponsor.  

While plan sponsors are not liable for participant excise taxes (or the RMD calculation), ERISA fiduciary principles emphasize prudence and participant-focused governance. That translates into a reasonable expectation that plan sponsors must:

• Ensure RMD communications are being provided and are clear and timely
• Monitor recordkeeper practices related to RMDs
• Ensure participants are educated on current RMD rules

Repeated participant failures can signal a governance gap, even if no formal compliance violation exists.

Why Missed RMDs Persist

Vanguard’s research indicates that participants who opt into automation and consolidate accounts are significantly less likely to miss RMDs. Despite automation and widespread guidance, Vanguard’s data shows that many investors, particularly self-directed and those with smaller account balances, still fail to take full RMDs. The most common reasons include:

• Lack of awareness or understanding of the age and calculation rules
• Multiple retirement accounts across providers
• Complex IRS rules that differ among account types

Behavioral patterns also matter: once a retiree misses an RMD, they are more likely to miss another the following year, according to Vanguard’s data, leading to “sticky” non-compliance.

The Bottom Line

The rising costs and complexities associated with RMD compliance, as highlighted in Vanguard’s recent research, aren’t just academic. They illustrate a real, ongoing challenge for retirees and a meaningful opportunity for plan sponsors to enhance education, support participant decision-making, and reduce unnecessary penalties for participants.

Action Items for Plan Sponsors

To help ensure RMD rules are followed and the plan stays compliant, plan sponsors should consider the following action items:

• Communicate with participants. The plan’s recordkeeper likely creates and distributes the required RMD notification, but additional education may be provided by the plan to help ensure participants are informed. Education can include RMD timing, calculation basics and common pitfalls to avoid.
• Encourage automated RMD solutions and, where appropriate, consolidation of multiple retirement accounts to simplify compliance.
• Coordinate with recordkeepers to ensure notices are timely, clear and actionable.
• Reinforce that while the participant bears ultimate responsibility, the plan provides tools and education to support compliance.

[i]How Costly Are Missed RMDs? Vanguard, December 17, 2025. https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/how-costly-are-missed-rmds.html.

[ii]Internal Revenue Service, ”Retirement Topics—Required Minimum Distributions (RMDs),” last reviewed or updated May 27, 2025, IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds?utm_source=chatgpt.com