Question

An IRA uses immediate annuities to pay out benefits; the IRA owner is nearly 75 years old when he decides to collect distributions. What kind of penalty would the IRA owner pay?

Answer 1

The IRA owner, being nearly 75 years old, would not pay a penalty on distributions as they are above the penalty age. Traditional IRAs require distributions to be taxed as ordinary income but without penalties after age 59 ½, and RMDs must start at age 72 to avoid a 50% excise tax.

Step-by-step explanation:

When an IRA owner starts collecting distributions, typically there should not be a penalty if they are of the age 59 ½ or older. Since the IRA owner in this scenario is nearly 75 years old, they are well beyond the age where early distribution penalties would apply. Therefore, for traditional IRAs, distributions are considered normal and are taxed as ordinary income at the time of withdrawal, but there are no penalties for being over the required minimum distribution age.

It's important to note that traditional IRAs generally require owners to begin taking required minimum distributions (RMDs) starting at age 72. If the IRA owner had failed to take RMDs beginning at age 72, there could be a substantial penalty—specifically, a 50% excise tax on the amounts not distributed as required. Since the IRA owner in this question is nearly 75 and is using immediate annuities which pay out benefits, it implies they are taking distributions, and thus they would not be subjected to this penalty.

Traditional IRAs are tax-deferred accounts allowing individuals to invest pretax income towards investments that can grow without being taxed on capital gains or dividend income until withdrawal. They differ from Roth IRAs, which are funded with after-tax dollars, and for which qualified distributions are tax-free. Both types of IRAs have annual contribution limits which may change over time. For instance, in 2014 and 2015, the total contributions to all traditional and Roth IRAs could not exceed $5500 ($6500 if the individual was age 50 or older).

Answer 2

50% tax on the amount not distributed as required

Step-by-step explanation:

In this specific scenario, the individual will have to pay a penalty of 50% tax on the amount not distributed as required. This is mainly due to the fact that traditional IRA accounts require that distribution of benefits must begin no later than age 70½ if immediate annuities are used to pay for them. Failure to do so would have a consequence of a 50% tax on the undistributed amount, and must be paid by the owner of the account.