When individuals have retirement accounts and are either 70 1/2 years old or an older age and retired, the Internal Revenue Service, or IRS, requires that these individuals take out a minimum amount from their accounts each year to avoid a tax penalty the IRS enforces. Those who don't take out this minimum amount pay a 50 percent tax penalty on the difference between what was supposed to be taken out and what was actually taken out, states the IRS.Continue Reading
The IRS provides calculators and tables that tell the minimum distribution a person needs each year, and this amount can vary by the type of account and the beneficiary, notes the IRS. The individual can either do the calculation with these materials or have a financial professional do so.
Each year, the person needs to withdraw the minimum amount by a deadline the IRS sets; however, the person can choose to take out more than this minimum. This deadline is usually December 31st unless it is the first withdraw the person is making. The IRS determines any penalty when a tax return is filed and IRS distributions are reported. The 50 percent tax penalty can also be enforced if the person misses the deadline.
It is possible to have the penalty waived if there was a reasonable cause. The IRS Form 5329 is available for individuals to explain the reason and make plans to fix the shortfall, notes the IRS.Learn more about Financial Planning