West Virginia State Life Insurance Practice Exam

What is the consequence of failing to start IRA distributions by the required age?

1. A loss of benefits

2. A penalty tax

3. Immediate tax liability

4. Increased premiums

The correct answer is: A penalty tax

Failing to start IRA distributions by the required age results in a penalty tax. The Internal Revenue Service (IRS) mandates that individuals must begin to withdraw a minimum amount from their traditional IRAs by April 1 of the year following the year in which they turn 72. If an individual does not take their required minimum distribution (RMD) on time, they are subject to a significant penalty. Specifically, the penalty is 50% of the amount that should have been withdrawn but was not. Understanding this rule is essential for maintaining compliance with federal regulations governing retirement accounts. As for the other options, while there may be implications related to loss of benefits or tax liabilities in broader contexts, the direct financial consequence tied specifically to the failure to initiate distributions is the imposition of the penalty tax. This requirement is intended to ensure that individuals eventually utilize their retirement savings rather than deferring distributions indefinitely.