A 75-year-old client withdrew $20,000 from her IRA. How much will she owe the IRS if the withdrawal was short of her required minimum distribution?

When a client reaches the age of 72 (previously 70½), they are required to begin taking minimum distributions from their Individual Retirement Accounts (IRAs). If the client in question, who is 75 years old, withdrew $20,000 but did not fulfill her required minimum distribution (RMD), she may face a penalty for the shortfall.

The penalty for failing to take the full RMD is 50% of the amount that was supposed to be taken but was not. This means that if her RMD was, for example, $25,000 and she only withdrew $20,000, she would be considered to have shorted her RMD by $5,000. Consequently, the penalty would be 50% of that $5,000, resulting in a tax liability of $2,500 due to the shortfall.

In this case, assuming the client was supposed to withdraw a specific amount larger than what she took out, the calculated penalty would be based on the amount she failed to withdraw. Therefore, only if the shortfall had amounted to $10,000 would the penalty be $5,000, which aligns with the correct answer provided.

This illustrates the importance of understanding the RMD requirements