Fidelity and Vanguard Say This RMD Mistake Could Cost You Thousands

If you have a traditional IRA or 401(k), you are required by law to withdraw a minimum amount each year once you reach the required minimum distribution (RMD) age. Missing that withdrawal carries a steep IRS penalty, and according to new research from Vanguard and Fidelity, it happens far more often than most people realize. For anyone trying to build and protect a solid retirement plan, this is the kind of mandatory tax rule where a simple oversight can cost thousands of dollars.

Both firms are flagging this risk as a serious and widespread problem, and the data behind their warnings makes it worth understanding fully before the next December 31 deadline arrives.

The penalty and the correction path

According to Fidelity's guidance on missed RMDs, the penalty for missing a required minimum distribution is a 25% excise tax on any amount that should have been withdrawn but wasn't. If your RMD for the year was $10,000 and you took nothing, you owe the IRS $2,500 before you've even touched the underlying tax on the withdrawal itself. That penalty applies to the shortfall, not the full account balance.

There is an important correction window that most people don't know about. If you take the missed distribution and file IRS Form 5329 within two years of the original deadline, the penalty drops to 10%. For that same $10,000 RMD, correcting within two years costs $1,000 rather than $2,500. The IRS may also waive the penalty entirely for a reasonable good-faith error, provided you correct it promptly and attach a written explanation to Form 5329. Fidelity notes that the IRS generally responds positively when you are doing the right thing quickly.

It is worth knowing that before SECURE 2.0 took effect in 2023, the original penalty was 50%. The reduction to 25% makes a significant difference, but the stakes are still high enough that prevention is far better than correction.

The scale of the problem

Vanguard's December 2025 research put numbers to a problem that the industry had long recognized anecdotally. The firm analyzed approximately 400,000 RMD-age clients with traditional IRA balances and found that 6.7% took no withdrawal at all in 2024. The average missed distribution among those clients was $11,600, generating a potential penalty of $1,160 to $2,900 per person.

Scaled to the roughly 8.7 million RMD-age IRA holders nationwide, Vanguard estimates that approximately 585,000 IRA holders miss distributions each year, with total collective penalties running as high as $1.7 billion annually. "Missed RMDs are a billion-dollar mistake," said Aaron Goodman, Vanguard senior investment strategist and lead researcher. Self-directed investors were three times more likely to miss RMDs than advised investors, and the behavior was sticky: 55% of investors who missed an RMD in one year also missed it the next.

As of late November 2025, 53% of Fidelity investors with a 2025 RMD due had not yet taken it, according to CNBC's reporting on Fidelity's own data. Of the outstanding distributions, 29% were tied to inherited IRAs, which have their own distinct and often misunderstood rules.

The inherited IRA problem

Inherited retirement accounts are where the most confusion, and the most costly mistakes, tend to concentrate. Under the SECURE Act of 2019, most non-spouse beneficiaries who inherited a traditional IRA from someone who died after December 31, 2019, must empty the account within 10 years. If the original account owner had already started taking RMDs before death, non-spouse heirs must also take annual distributions throughout the 10-year period, not simply wait until year 10 to withdraw everything. Many beneficiaries remain unaware that the rules changed in 2020.

Spousal beneficiaries have more flexibility. They can transfer inherited assets into their own IRA and treat the account as their own, effectively rolling the clock on their RMD age. Non-spouse beneficiaries, including adult children, do not have that option.

The IRS waived penalties for missed inherited IRA distributions from 2021 through 2024 while it finalized related guidance, but the waiver ended in 2025. That means heirs who got comfortable with the grace period now face the full penalty structure on any future misses.

What to do about it

Both Fidelity and Vanguard point to the same practical solutions. Vanguard's Goodman noted that with the average worker changing jobs nine or more times in their career, tracking all outstanding retirement accounts is genuinely difficult. Forgotten accounts at former employers are a common source of missed RMDs, which is exactly why he recommends consolidating old employer plans into a single traditional IRA. A single account means a single RMD calculation and a single annual deadline to track.

Both firms also offer free automatic RMD services that calculate the required amount each January and distribute it on a schedule the account holder chooses. Setting up automatic distributions removes the risk entirely. "Combining IRAs and putting RMDs on autopilot takes forgetting out of the equation," Goodman said.

Bottom line

The December 31 deadline is not flexible, and the IRS's ability to reduce penalties depends on how quickly you act after a miss. If you have a traditional IRA or 401(k), or if you've inherited a retirement account, confirming your distribution status before year-end is a straightforward step that could save you thousands of dollars.

The single most effective move could be to set up automatic distributions through your brokerage. It costs nothing, removes the annual risk, and is one of the simplest ways to check up on your retirement readiness and protect the savings you've spent decades building.

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Author Details

Sarah Brooks

Sarah Brooks specializes in money management, investing, income strategies, and building wealth. Her work can be found on SoFi, LendingTree, and GOBankingRates.