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Required Min (P1)

Required Min
  • LERO
  • Pre-LERO/72(t)

  • When would a 50% tax penalty be imposed?
    An individual cannot defer funds in a qualified retirement account indefinitely (other than Roth IRAs). At some point the funds must begin to be distributed, and taxes must be paid on the amounts received. The IRS has specified that all owners of qualified retirement plans such as IRAs (other than Roth IRAs), 403(b)s, 457s, etc., must begin receiving required minimum distributions no later than April 1st of the year following the year in which the owner attains age 70 ½ — even if he or she is not retired. This is known as the required beginning date. For every year after the 70-½ year, the required minimum distribution must be made by December 31st.

    For example, a woman born on February 26, 1932, would reach age 70 on February 26, 2002. This means she would be age 70 ½ on August 26, 2002 — which is exactly six months later. For tax year 2002 (her 70 ½ year), this woman must receive the required minimum distribution by April 1, 2003. She must also receive the required minimum distribution for 2003 by December 31, 2003. (This means that if this individual does not receive her required minimum distribution for 2002 until 2003, she will have to pay taxes on both the 2002 and 2003 distributions in the year 2003.)

    If, however, no distribution is taken or if the distribution is not large enough (as determined by using an age-based IRS distribution table), the IRS imposes a tax penalty equal to 50% of the amount by which the required minimum distribution amount exceeds the actual amount distributed. For example, consider an individual who has received a total of $25,000 in annuity payments from his qualified retirement plan this year. According to the IRS distribution table, however, he or she should have received no less than $35,000 — which exceeds his actual distribution by $10,000. Consequently, the tax imposed by the IRS is $5,000.

    How can the 50% tax penalty be avoided?
    Simply speaking, the 50% tax penalty can easily be avoided by beginning the required minimum distributions by the required beginning date and in the required amounts. According to the Internal Revenue Code, a participant’s retirement funds must be distributed over his or her life or over the joint lives of the participant and his or her designated beneficiary.

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