Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceHard
A client is 68 years old, retired, and has a Traditional IRA. They are subject to Required Minimum Distributions (RMDs) but fail to withdraw the correct amount for the year. What is the penalty for failing to take the full RMD?
- A10% excise tax on the under-distributed amount.
- B25% excise tax on the under-distributed amount.
- C50% excise tax on the under-distributed amount.
- DForfeiture of the entire IRA balance.
Show answer & explanationAnswer & explanation
Correct answer: B. 25% excise tax on the under-distributed amount.
Effective for tax years beginning after December 31, 2022 (under SECURE 2.0 Act), the penalty for failing to take the full Required Minimum Distribution (RMD) from a Traditional IRA is generally a 25% excise tax on the amount not distributed. This can be reduced to 10% if the RMD is taken and the tax is paid within a certain correction period.
Why the other options are wrong
- A. This was the penalty before the SECURE 2.0 Act, or if corrected promptly; the general penalty is 25%.
- C. 50% was the penalty prior to the SECURE 2.0 Act, which is no longer the current general penalty for RMDs.
- D. Forfeiture of the entire IRA balance is an extreme and incorrect penalty for RMD failures.
RMD Penalty (SECURE 2.0)
The penalty for failing to take the full Required Minimum Distribution (RMD) from a Traditional IRA or other qualified plan is a 25% excise tax on the under-distributed amount, which can be reduced to 10% if corrected promptly.
- Applies to Traditional IRAs and qualified plans
- Penalty is 25% of the under-distributed amount
- Can be reduced to 10% if corrected timely
- First RMD by April 1 of year following age 73 (formerly 72, 70.5)
Memory trick: Missed RMD? Quarter of it's gone!