IRA Rules for RMDs & Other Withdrawals

You have spent years accumulating assets in your IRA. If you contributed to a traditional IRA, you took a tax benefit during the year you made the contribution(s) by deducting this amount on your tax return. Your earnings can potentially grow tax-deferred until you withdraw the money. If you contributed to a Roth IRA, you made contributions with after tax dollars. These contributions can potentially grow tax-free and are tax-free at withdrawal. Unfortunately, you cannot keep the funds in your retirement account indefinitely. Below are guidelines for IRA withdrawals.

Guidelines for withdrawals

Withdrawals before age 59½
You may withdraw Roth IRA contributions at any time both tax-free and penalty-free. However, if you are under the age of 59½ and these withdrawals exceed your contributions, you could be subject to both taxes and penalties.

Any withdrawal from your traditional IRA before the age of 59½ will result in a 10% federal penalty tax plus ordinary income tax on the entire amount of the withdrawal.

Withdrawals between ages 59½ & 70½
You can withdraw from a Roth and traditional IRA penalty-free at the age of 59½. With a Roth IRA, you will pay no taxes on withdrawals, provided your account has been open for at least 5 years . With a traditional IRA, you will pay ordinary income taxes on the full amount of your withdrawal. Also, just because you turn age 59½ does not mean it is mandatory for you to start withdrawing your money.

Withdrawals at age 70½ & older
If you own a Roth IRA, there’s no mandatory withdrawal at any age.

If you own a traditional IRA, you must take your first required minimum distribution (RMD) by April 1 of the year following the year you reach age 70½. For each subsequent year, you must take your RMD by December 31. The RMD amount is based on your life expectancy and the value of your account. If you fail to take your RMD you will be penalized with a 50% excise tax on the amount that was not distributed as required. Also, it is not always best to wait until April 1 of the year after you reach age 70½ because you will be required to take two RMD’s and that could increase your taxes.

Saving money in an IRA is a valuable aspect of retirement planning. It allows you to put money away that can potentially grow tax-free or tax-deferred for many years. Depending on which type of IRA you open, those withdrawals could be tax-free as well. While you can withdraw funds from your IRA at any time, it is best to do so under the aforementioned guidelines to avoid excess taxes and penalties on these withdrawals. As always, if you have any questions regarding your specific situation, please do not hesitate to give us a call.

1 Some exceptions do apply
2 The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you’re under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you’re required to keep track of the 5-year holding period for each conversion separately