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Excess Accumulation Theory - Explained

What is the Excess Accumulation Theory?

Written by Jason Gordon

Updated at April 8th, 2022

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Table of Contents

What is an Excess Accumulation Penalty?How does an Excess Accumulation Penalty Work?Types of Retirement AccountsAcademic Research on Excess Accumulation Penalty

What is an Excess Accumulation Penalty?

Excess accumulation penalty is a penalty that the Internal Revenue Service imposes on the owner of a retirement account or beneficiary when they fail to withdraw the minimum amount from the retirement account due for a year. Typically, the IRS stipulates that owners and beneficiaries of retirement accounts withdraw a certain minimum amount from their account annually to avoid excess accumulation, this is often called the required minimum distribution. When they fail to withdraw the minimum account, an excess accumulation penalty follows.

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How does an Excess Accumulation Penalty Work?

The IRS charged 50 percent excise tax as excess accumulation penalty if owners and beneficiaries of retirement accounts fail to distribute the minimum amount required. The required minimum distribution (RMD) states that retirement account holders above the age of 72 and their beneficiaries must withdraw a certain amount every year. The underlying age for RMD was previously 70 before it was increased to 72 years. Failure to withdraw the minimum required distribution for a year attracts 50% of the excess accumulation as a penalty. In certain cases, account holders and beneficiaries can waive the excess accumulation penalty if there is a compelling factor that made it impossible for them to withdraw the minimum amount. Excess accumulation penalty was introduced to prevent retirement account owners from keeping the amount in their accounts indefinitely. By law, retirees must begin to receive distributions from their accounts once they reach the age of 70 .

Types of Retirement Accounts

Several types of retirement plans or accounts exist and the required minimum distribution applies to them, failure to make the minimum withdrawal attracts the excess accumulation penalty. The major types of retirement accounts include the following;

  • SIMPLE ERA plan
  • Payroll deduction IRA
  • Salary Reduction Simplified Employee Pension (SARSEP)
  • 401k Plan
  • Simplified Employee Pension (SEP)
  • SIMPLE 401k Plan
  • Defined-Benefit Plan
  • 403b Tax-Sheltered Annuity Plan
  • Profit-Sharing Plan Money-Purchase plan


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