Warren Buffett's stock-picking brilliance has been well cataloged for all investors to absorb. Curiously, though, his most important rules have nothing to do with evaluating potential investments. His top two priorities? Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.
Message received. Above all else, start and finish with a smart defense. The irony is, too many investors struggle to follow these two simple and highly important rules.
I'm not talking about temporary setbacks, like a decline in a stock's price (which is frustrating but common). Rather, a shocking number of people are simply handing money over to the IRS due to a procedural error.
That error is failing to take a minimum annual distribution from a retirement account that requires them. The average penalty? At the low end, according to Vanguard, in 2024, their customers paid an average of $1,160 per person, per year.
The kicker? More than half of these investors make the mistake more than once! Here's a closer look at the shocking reality of the matter.
What's a required minimum distribution?
Once you reach the age of 73, the IRS starts looking for some of the tax revenue that's been deferred by your utilization of a non-Roth retirement account. The minimum taxable withdrawal is a percentage of the account's value as of the end of the previous calendar year -- but that percentage increases with age.
The IRS provides worksheets to help you determine your particular minimum distribution, while your IRA's custodian or brokerage firm can supply you with these accounts' year-end values.
There's some flexibility with how you take your RMD, too. You can make this withdrawal at any point in the year. In the year you turn 73, you have until April 1 of the following year to complete your first withdrawal. (However, bear in mind this will mean two taxable distributions are taken in the same tax year, potentially pushing you into a higher tax bracket.)
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You don't need to take an RMD from every retirement account if you happen to have more than one. As long as you withdraw your calculated minimum, the IRS doesn't care which account(s) it comes from -- with the exception of 401(k) accounts that are still being funded.
The only thing you can't do is mix and match different types of IRAs for this purpose. For instance, you can only combine 403(b) accounts with other 403(b) accounts to determine the RMD you must take from this type of account, just as you can only combine the values of your traditional IRAs to determine your RMD from this category of retirement accounts.
These logistical details, however, don't seem to be retirees' biggest stumbling block. It's taking these distributions in the first place that trips up many investors.
Shocking numbers
When mutual fund giant and retirement plan administrator Vanguard's Senior Investment Strategist and Research Team Leader Aaron Goodman said late last year that "missed RMDs are a billion-dollar mistake," he wasn't kidding or overstating the matter.
Vanguard crunched the numbers for its own retirement account holders, finding that nearly 7% of its customers that should have taken an RMD in 2024 simply failed to do so. With an IRS penalty of between 10% and 25% (depending on the situation) on what was supposed to be an average distribution of about $11,600, these investors incurred average penalties of between $1,160 to $2,900.
Vanguard then extrapolated these numbers to the rest of the 8.7 million Americans who are at the age where annual distributions from retirement accounts are required. Based on this math, Vanguard estimated that 585,000 IRA owners didn't take the RMDs they should have in 2024, collectively costing them between $680 million and $1.7 billion in penalties for that year alone.
Perhaps even more alarming is that 55% of the people who failed to make their required withdrawals in 2024 also didn't do so in 2023, essentially doubling their penalties. Somehow, it feels like a good bet that the majority of these retirees ended up missing their 2025 deadlines, as well
Make an action plan
If you're one of the RMD-aged people who missed the 2025 year-end deadline to complete your annual required withdrawal, don't beat yourself up too much. It happens. You may be able to convince the IRS to waive your penalty.
You can fill out IRS form 5329 to make a timely voluntary correction of a missed RMD. It also allows you to make your case that the mistake was "due to reasonable error and you are taking reasonable steps to remedy the shortfall." It's worth a shot. The worst the agency can do is say no.
However, you don't want to count on catching a break from the federal government's tax-collection arm. You'd be much better served by being proactive about your required distributions from an IRA, even if only to make trade exits at an optimal price.
If you need a little help, many brokerage firms and retirement account custodians now offer automated RMDs. Those options might be worth checking out to make sure you avoid the risk of a penalty that could cost you a few thousand bucks every year.
