Turning 73? The Market's Expectation Gap on Your RMD Deadline

The regulatory change was clear and widely anticipated. The SECURE 2.0 Act, signed into law in December 2022, raised the required minimum distribution (RMD) age from 72 to 73, effective January 1, 2023. For the market and retirement planners, this was a known variable. The expectation was that investors would adjust their withdrawal strategies accordingly, smoothing the transition. The policy's intent was to provide more flexibility, allowing funds to grow longer and potentially fine-tune the mix of Social Security and retirement plan distributions.

Yet the real-world impact reveals a significant expectation gap. The market's priced-in assumption-that people would reliably adapt-collides with the data. A recent report shows that in 2024, some 6.7% of Vanguard investors at RMD age missed their yearly withdrawal. That's a notable failure rate for a mandatory rule. The financial consequence is tangible: these missed distributions could cost up to $1.7 billion yearly in IRS penalties. This isn't just about a few forgetful retirees; it's a systemic friction point where the theoretical benefit of a later start age is undermined by practical execution.

Adding to the uncertainty is a regulatory delay that creates a new layer of complexity. The IRS has pushed back the final effective date for some SECURE 2.0 provisions, including key RMD rules for employer plans, until January 1, 2026. This delay, while giving fiduciaries more time to implement, also means the full rulebook remains unclear for another year. It introduces a period of ambiguity where investors and advisors must rely on a "reasonable, good-faith interpretation" of the law, increasing the risk of errors.

The bottom line is a disconnect between policy design and investor behavior. The law aimed to simplify and extend growth, but the data shows many are still falling through the cracks. The expectation that a higher starting age would be seamlessly adopted has not been met. Instead, we see a market reaction characterized by missed deadlines and looming penalties, highlighting that the real-world friction of compliance often exceeds the theoretical benefits of regulatory change.

The Financial Reality: Tax Impact vs. The "Free Money" Myth

The common investor expectation is that retirement savings are a form of "free money" to be drawn down at will. The reality of RMDs is a stark correction to that myth. These distributions are not a gift; they are a tax event. The IRS treats RMDs as ordinary income, which can unexpectedly push retirees into a higher tax bracket when combined with other sources of income like Social Security and investment gains. This is the core of the expectation gap: the belief that retirement income will be lower, often contradicted by the actual tax bill.

The penalty for missing this tax event is severe and underscores the mandatory nature of RMDs. If an investor fails to withdraw the required amount, the penalty is 25% of the amount not withdrawn. While this can be reduced to 10% if the shortfall is corrected within two years, the initial hit is substantial. This creates a direct financial incentive to comply, but also a high-stakes risk for those who forget or misjudge the rules.

This penalty structure highlights a critical divergence in the retirement landscape. The expectation gap widens when comparing traditional accounts to Roth IRAs. While traditional IRAs and 401(k)s mandate these taxable withdrawals, withdrawals from Roth IRAs and Designated Roth accounts are not required until after the death of the account owner. For many, RMDs are a necessary but unwelcome tax liability on money they may not need. The Roth account, by contrast, offers both tax-free withdrawals and the freedom to let assets grow indefinitely. This creates a clear expectation gap: traditional account holders are forced to take money out and pay taxes, while Roth holders are not.

The Vanguard data point on missed distributions provides the practical context for this risk. The fact that some 6.7% of Vanguard investors at RMD age missed their yearly withdrawal means a significant portion of the market is exposed to this penalty. It's a tangible reminder that the theoretical benefit of tax-deferred growth is paired with a mandatory, costly unwind. The "free money" illusion is shattered by the reality of ordinary income taxation and the 25% penalty for non-compliance.

Catalysts and Risks: What to Watch for the RMD Thesis

The expectation gap between policy and practice is a live thesis, and its resolution hinges on a few forward-looking catalysts. The immediate test is the delayed implementation. The IRS has pushed back the effective date for key SECURE 2.0 RMD rules until January 1, 2026. This creates a near-term catalyst: if the final regulations are implemented smoothly, it could reduce the current uncertainty and lower the risk of compliance errors. Conversely, any further delays or complex interpretations could perpetuate the gap, keeping the "reasonable, good-faith" compliance burden high.

The longer-term signal will be trends in missed RMD rates after 2026. The Vanguard data showing nearly 7% of IRA investors missed their RMDs in 2024 is a baseline. The market's priced-in expectation is that automation and better advice will eventually close this gap. Investors should watch for a sustained decline in that miss rate in the years following the 2026 implementation. A failure to see improvement would confirm that the friction of compliance remains a persistent, costly reality for a significant portion of the market.

Finally, there is a looming future reset that investors are not yet pricing in. The law provides for another jump in the RMD starting age, to 75, effective January 1, 2033. This represents a major expectation gap in the making. The market is currently operating under the 73-year-old rules. The prospect of a later start age in seven years introduces a new layer of long-term planning uncertainty. It could encourage some to delay withdrawals further, but it also risks creating another wave of missed distributions if the transition is not managed. For now, the 2033 change is priced out of the picture, making it a potential surprise catalyst down the road.

The bottom line is that the RMD thesis is not static. It is being tested by the 2026 implementation, monitored by post-2026 compliance data, and set for a future reset in 2033. Each of these events will either confirm the gap or signal that the market is finally catching up to the reality of retirement plan rules.