Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

True or False: To avoid a late withdrawal penalty, IRAs have a required minimum distribution (RMD) provision.

1. True

2. False

3. Only for Roth IRAs

4. Only for Traditional IRAs

The correct answer is: True

The statement is true because Individual Retirement Accounts (IRAs), specifically Traditional IRAs, have a required minimum distribution (RMD) provision that mandates account holders to begin withdrawing a minimum amount from their accounts starting at age 73, as of the current regulations. Failing to take these distributions can result in a significant penalty, specifically a 25% excise tax on the amount that was not withdrawn as mandated. Roth IRAs, on the other hand, do not require withdrawals during the account holder's lifetime. Therefore, the RMD requirement specifically applies to Traditional IRAs to ensure that the funds are eventually taxed. This structure is designed to prevent individuals from deferring taxes indefinitely on their retirement savings, thus emphasizing the importance of the RMD provision in avoiding late withdrawal penalties.