Certified Financial Consultant (CFC) Practice Exam

What is the penalty for IRA distributions that are less than the required minimum for the year?

1. 10%

2. 20%

3. 30%

4. 50%

The correct answer is: 50%

The penalty for IRA distributions that are less than the required minimum for the year is indeed 50%. This significant penalty is enacted to encourage individuals to withdraw the required minimum distributions (RMDs) from their retirement accounts, particularly after reaching the age of 72 (as of current regulations). The IRS imposes this penalty as a form of deterrent against under-distribution, ensuring that individuals do not prolong their tax-deferred growth unnecessarily or avoid taxation on their retirement savings. The penalty applies to the amount by which the required distribution exceeds what was actually withdrawn. If, for example, an individual is required to withdraw $10,000 but only takes out $5,000, the IRS would impose a 50% penalty on the $5,000 shortfall. Hence, the penalty serves the dual purpose of enforcing compliance with RMD rules and ensuring that retirement funds are eventually taxed, as they were intended to be. Understanding this penalty is crucial for retirement planning, as failing to comply with RMD requirements can lead to significant financial ramifications, affecting not only an individual's retirement income but also their overall tax strategy.