What penalty applies to someone who fails to meet their required minimum distribution from a traditional IRA?

The penalty for failing to take the required minimum distribution (RMD) from a traditional IRA is indeed a 25% penalty on the shortfall, which is the amount that was not withdrawn as required. This penalty exists to encourage account holders to use their retirement funds during their retirement years, rather than leaving them to grow indefinitely within the tax-advantaged account.

When individuals reach the age of 72 (or age 70½ for those who turned 70½ before January 1, 2020), they are mandated by the Internal Revenue Service (IRS) to start withdrawing minimum amounts from their traditional IRAs each year. If they do not withdraw at least the required amount, the IRS imposes a substantial penalty of 25% on the shortfall amount. It’s important for individuals to be aware of this requirement, as the penalty can have a significant impact on their long-term financial situation.

Overall, this rule highlights the government's intent to ensure that individuals utilize their retirement savings rather than indefinitely defer taxation on those funds.