Fidelity, Vanguard have a warning for anyone taking RMDs

Millions of retirees with traditional IRAs and 401(k) plans must take required minimum distributions (RMDs) before the December 31 annual deadline.

Missing that withdrawal can trigger an IRS penalty equal to 25% of every dollar not withdrawn on time, according to the Internal Revenue Service.

Fidelity Investments and Vanguard are both highlighting this risk in recent retirement guidance, warning that the mistake is far more common than most people assume.

Fidelity's guidance outlines the penalties, correction paths, and filing requirements that apply when a withdrawal falls short of the legal minimum. Vanguard's December 2025 research quantifies just how widespread the problem is.

What many retirees do not realize is that Congress reduced the original penalty and created a two-year window to further reduce it.

SECURE 2.0 cut the RMD penalty, but the stakes remain high

Before 2023, the penalty for missing an RMD was 50% of the amount you should have withdrawn by the annual deadline, the Federal Register stated.

The SECURE 2.0 Act reduced that excise tax to 25% of the shortfall, a meaningful reduction that still represents a painful hit for retirees.

The penalty drops to 10% if you withdraw the missed amount and file IRS Form 5329 within two years of the original deadline, Fidelity noted.

For a retiree who should have takem a $10,000 distribution but took only $8,000, the tax on the $2,000 shortfall would be $500 at the 25% rate.

If corrected within the two-year window, that penalty falls to $200, cutting the cost by 60% under current rules, according to Fidelity.

The IRS may also waive the penalty entirely for those who show that a reasonable error caused the shortfall and that they promptly took corrective steps.

Form 5329 instructions and IRS Publication 590-B explain that to request that waiver, retirees must attach a written explanation to Form 5329.

Vanguard data reveals how common RMD mistakes really are

Fidelity is not the only financial institution flagging this issue for retirees approaching or past the withdrawal age.

About 6.7% of Vanguard's IRA investors at distribution age failed to take any withdrawal during 2024, Vanguard found in its analysis of roughly 400,000 accounts.

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Scaling that rate nationwide, Vanguard estimated that roughly 585,000 IRA holders miss their distributions each year, resulting in collective penalties of up to $1.7 billion.

The average missed distribution totaled $11,600, and the resulting tax penalties ranged from $1,160 to $2,900 per person, Vanguard found.

"Missed RMDs are a billion-dollar mistake," Aaron Goodman, a Vanguard senior investment strategist and leader of the research team, said in the report.

As of November 30, 2025, 53% of Fidelity investors who needed to take a 2025 RMD had not yet done so, and 29% of those outstanding RMDs were tied to inherited IRAs, CNBC reported.

Jacob Wackerhausen/Getty Images

Inherited IRAs create a separate set of distribution pitfalls

The missed-distribution risk extends beyond accounts you opened yourself; inherited retirement accounts have their own deadlines and penalty exposure.

If you inherited a traditional IRA from someone who passed away after 2019, the SECURE Act's 10-year depletion rule applies to most non-spouse beneficiaries, Fidelity noted.

Scott Van Den Berg, Certified Financial Planner and President of Century Management, told CNBC that many heirs who inherited retirement accounts are unaware of the distribution rule changes that took effect under the SECURE Act.

Many beneficiaries have no idea the rule changed

Under that rule, you must empty the inherited account within a decade of the original owner's death, and annual withdrawals may also apply during that window.

Spousal beneficiaries retain more flexibility and can transfer inherited assets into their own IRA, delaying distributions until their own required beginning date, the IRS confirmed.

Automating withdrawals can prevent a costly year-end surprise

Vanguard's research suggests that retirees relying solely on memory to meet the annual deadline face an elevated risk, especially those with small, forgotten accounts spread across multiple custodians.

Most major brokerages, including Fidelity and Vanguard, offer free automatic distribution services that calculate the required amount each January and pay it out on a schedule you choose.

Goodman, of Vanguard, noted that consolidating old employer plans into a single traditional IRA can simplify the process to a single calculation and a single annual deadline.

"With investors changing jobs nine times or more in their working careers, it's tough to keep tabs on all retirement accounts," Goodman noted. "Combining IRAs and putting RMDs on autopilot takes forgetting out of the equation."

With the December 31 deadline approaching, Vanguard's research points to automation and early-year processing as ways retirees have reduced missed-RMD risk.

Related: Fidelity reveals serious gap in retirement portfolios

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This story was originally published July 5, 2026 at 5:33 AM.