- The IRS imposes a 50 percent penalty on the amount you should have withdrawn from your retirement account, but did not. This penalty is due in the year you failed to take the withdrawal. The mandatory withdrawal is called a required minimum distribution, or RMD. This RMD amount is mandatory on all traditional retirement accounts, like traditional IRAs and 403b plans, as well as Roth 401k plans and other employer-based retirement plans.
- The 50 percent penalty significantly reduces the amount of money you have in your retirement savings. This penalty persists until you make the required withdrawal. You effectively lose this money forever. You may find you need money later on in life, but don't have what you need due to your failure to make the required withdrawals.
- A possible solution to this problem is to file IRS Form 5329. This form allows you to file an exception to the 50 percent RMD penalty. There is no guarantee that the IRS will accept the exception. However, the IRS will consider it when you file this form. Normally, the IRS allows exceptions in cases when the failure to take a withdrawal was made due to a "reasonable error."
- You may want to convert your traditional retirement account to a Roth account if you plan on keeping the money as a savings. The conversion to a Roth IRA will eliminate future income tax on withdrawals from the account, but it will also eliminate the requirement to make withdrawals in the first place. You must pay income tax on all of the money you convert to the Roth, but beyond that, no further income tax or withdrawals are required.