What Is the Excess Accumulation Penalty?

The excess accumulation penalty is levied by the Internal Revenue Service (IRS) when a retirement account owner or the beneficiary of a retirement account fails to withdraw the minimum amount required for a tax year.

This amount is known as the required minimum distribution (RMD). Retirement account holders over age 72 and their heirs of any age are generally required to take RMDs to avoid the excess accumulation penalty. The RMD age was previously 70.5 but was raised to 72 following the December 2019 passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act.

Understanding the Excess Accumulation Penalty

An excess accumulation penalty of 50% excise tax for that year may be charged if withdrawals made by the account owner are lower than the required minimum distribution for the year.

Generally, account owners must begin receiving distributions by April 1 of the year following the year in which they reach age 72.

The reason for this is simple: If you contribute pre-tax dollars to a retirement account, the IRS wants those tax dollars at some point. The penalty applies to traditional IRAs, including SEP and SIMPLE IRAs. It does not apply to Roth IRAs, as the taxes have already been paid on those dollars.

The required minimum distribution for any year after the year in which the person reaches age 72 must be made by Dec. 31 of that year. If the excess accumulation is due to reasonable error, and the account holder has taken steps to remedy the error, a waiver of the penalty can be requested.

The amount required to be withdrawn is determined by the IRS and can be calculated by using its worksheet.

Types of Retirement Accounts

To fulfill these requirements, it's useful to review the different types of retirement accounts that require RMDs.

Payroll Deduction IRA

Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions. A payroll deduction IRA provides a simple and direct way for eligible employees to save.

Salary Reduction Simplified Employee Pension (SARSEP)

A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Instead of establishing a separate retirement plan, employers make contributions to their own IRA and the IRAs of their employees, subject to certain percentages of pay and dollar limits.

Simplified Employee Pension (SEP)

These provide a simplified method for employers to make contributions to a retirement plan for their employees. Instead of establishing a profit-sharing or money purchase plan with a trust, employers can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity established for each eligible employee.

SIMPLE IRA plan

SIMPLE IRA plans are tax-favored retirement plans that small employers, including self-employed individuals, can set up for the benefit of their employees. A SIMPLE IRA plan is a written salary reduction agreement between employee and employer that allows the employer to contribute the reduced amount to a SIMPLE IRA on the employee's behalf.

401(k) plan

A 401(k) plan is a defined-contribution plan that allows employee salary deferrals and/or employer contributions.

SIMPLE 401(k) plan

SIMPLE 401(k) Plans are available to small business owners with 100 or fewer employees. An employee can elect to defer some compensation.  

403(b) tax-sheltered annuity plans

These 403b tax-sheltered annuity plans are annuity plans for certain public schools, colleges, churches, public hospitals, and charitable entities deemed tax-exempt under Internal Revenue Code section 501c3.

Profit-sharing plan

A profit-sharing plan is a defined-contribution plan that allows discretionary annual employer contributions.

Money-purchase pension plan

A money-purchase pension plan is a defined contribution plan in which employer contributions are fixed.

Defined-benefit plan

A defined-benefit plan is funded primarily by the employer; it's the classic pension plan, now offered only rarely.