What is the penalty percentage for IRA distributions that fall below the required minimum for the year?

The penalty percentage for IRA distributions that fall below the required minimum for the year is indeed 50%. This penalty is applied to the amount not distributed that is required to be taken out under the required minimum distribution (RMD) rules.

The IRS mandates that individuals aged 72 and older must take a minimum amount from their traditional IRAs (and some other retirement plans) each year, known as the RMD. If a taxpayer does not withdraw the required amount, the penalty can be quite steep—a significant 50% of the amount that should have been withdrawn but was not.

This high penalty serves as a means to encourage individuals to withdraw and therefore pay taxes on their retirement savings, preventing tax-deferred growth indefinitely. Understanding this penalty is crucial for financial planning, particularly for those approaching or in retirement.