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

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What penalty does a 71-year-old face if they fail to take distributions from a Roth IRA?

$10,000 penalty
No penalty
Standard income tax on distributions
Early withdrawal penalty

The correct answer is: No penalty

The correct answer is that a 71-year-old would face no penalty for failing to take distributions from a Roth IRA. Roth IRAs are unique in that they do not have Required Minimum Distributions (RMDs) during the owner's lifetime. Unlike traditional IRAs, which require account owners to begin withdrawing funds at age 73, Roth IRAs allow the owner to keep their money invested for as long as they wish without incurring any penalties or taxes on the growth, provided certain conditions are met. This feature of the Roth IRA makes it a favorable option for retirees looking to leave money to heirs or hoping to minimize taxable income during their retirement years. Since there is no mandate to withdraw funds, the individual can avoid penalties entirely by simply not taking distributions, which is a significant advantage over other retirement accounts. This option stands in contrast to the penalties associated with traditional IRAs, which impose a penalty for failing to take RMDs after a certain age.