If you do not take the required minimum disbursements out of your retirement accounts annually, you could face stiff tax penalties.
Some people do not understand the bargain that is made with the government, at the time that they put money into their retirement accounts.
For qualified accounts, money can be put into retirement accounts on a pre-tax basis. No income tax needs to be paid on that money.
Many people think this is done to encourage people to save for retirement and to invest. However, that is only part of the purpose.
The government is counting on the money in the retirement accounts being withdrawn someday, and then taxing it. The government actually hopes to make more money overall through this arrangement.
Not understanding the government's reasoning, many people do not know that when they reach the age of 70 and a half they are required to take annual minimum disbursements out of their accounts. The government wants its taxes paid.
If the minimum amount is not taken out, there are stiff penalties as Financial Advisor discusses in "50% Tax on Missed RMDs May Be Waived."
If the required minimum amount is not taken out, then the IRS will tax the amount that should have been taken out at a steep rate of 50%. The government wants its tax money.
The good news is that the rate is so high not necessarily to be unduly punitive, but as a way to make sure the taxpayer does not make the same mistake twice.
That means the IRS will often waive the penalty.
This is an area where forgetfulness or ignorance of the law can be used as an excuse. However, it is unlikely that it will be waived a second time, so people should not count on that.
Reference: Financial Advisor (Aug. 14, 2017) "50% Tax on Missed RMDs May Be Waived."