Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A client is 72 years old and has a Traditional IRA. They are subject to Required Minimum Distributions (RMDs). Due to a recent medical emergency, they failed to take their RMD for the current year. Under SECURE Act 2.0, what is the penalty for failing to take a timely RMD?
- A50% of the untaken RMD amount, which can be reduced to 25% if corrected promptly.
- B100% of the untaken RMD amount.
- C25% of the untaken RMD amount, which can be reduced to 10% if corrected promptly.
- D10% of the untaken RMD amount.
Show answer & explanationAnswer & explanation
Correct answer: C. 25% of the untaken RMD amount, which can be reduced to 10% if corrected promptly.
Prior to SECURE Act 2.0, the penalty was 50%. The SECURE Act 2.0 reduced the penalty for failing to take a timely RMD to 25% of the amount not distributed. If the RMD is corrected in a timely manner (within a specified correction period) and a tax return is filed reflecting the correction, the penalty can be further reduced to 10%.
Why the other options are wrong
- A. This reflects the previous 50% penalty, with a reduction option that is now also incorrect.
- B. This is an incorrect penalty percentage; the penalty is not 100%.
- D. This is an outdated or incorrect penalty percentage.
RMD Penalty (SECURE Act 2.0)
Under SECURE Act 2.0, the penalty for failing to take a Required Minimum Distribution (RMD) from a retirement account is 25% of the untaken amount, reducible to 10% if corrected promptly.
- Penalty is 25% of untaken RMD
- Reduced to 10% if corrected promptly
- Prompt correction includes filing a corrected tax return
- Applies to Traditional IRAs, 401(k)s, etc.
Memory trick: RMD penalty: Don't miss it, or pay a quarter, maybe only a tenth if quick!