What is the Excess Accumulation Penalty?

by Investing School on January 12, 2013

Retirement plans usually contain stipulations regarding how long an individual has before they must distribute their funds. The required minimum distribution is the amount which must be distributed annually. Only a partial distribution may be required within a certain period. If, however, the beneficiary fails to withdraw or distribute the minimum amount due during a specific year they may have to pay a penalty.

The penalty for failing to distribute the required amount is 50% of the amount not distributed. That penalty is owed to the IRS. That is a significant incentive to withdraw distributions regularly and as required. This penalty is also called an excise tax and it applies to both the account owners and their beneficiaries. Ironically, an excise tax can also be applied if retirement funds are withdrawn prematurely.

The required minimum distribution is the portion of an IRA which must be distributed to the annuitant by age 70.5 or their retirement date. This amount is determined by the value of the account, how long the annuitant made contributions and how large said contributions were. The purpose of the penalty is to prevent the IRA from becoming unfairly valuable during retirement.

Participants are required to start taking required minimum distributions from their retirement accounts by April 1 of the year following they year in which they retire. RMDs must continue to be paid out annually from that point on. If they retire after that age, however, the payments may be delayed until April 1 in the year following that event.

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