Taking Money Out of Your IRA
Most of us think of IRAs and retirement plans as financial tools for asset accumulation.
We often pay little attention to how funds can be withdrawn from the accounts until
retirement. Here are some general rules on how funds coming out of IRA accounts are treated
for income tax purposes. This discussion only applies to regular IRAs since Roth IRAs are
treated very differently. You may want to consult your tax advisor or more details or to
determine how specific rules would apply to you.
Distributions before age 59 ½
The general rule is that funds withdrawn from an IRA qualified plan before age 59 ½
are subject to an additional tax of 10% on top of being reported as taxable income in the
year taken. However, there is a special rule that can be applied for distributions taken
using a life expectancy formula that will also avoid the penalty. There are a few exceptions
for death and disability.
Distributions from age 59 ½ to age 70 ½
Once you reach age 59 ½, you can then start withdrawing funds without penalty. You
can withdraw any amount from zero to the entire amount in the IRA. Withdrawals you take are
subject to income taxes. If you are still working or do not need the funds, you will
probably leave them in the account and continue to earn tax-deferred returns as long as
Distributions after age 70 ½
After you reach age 70 ½, you must start taking distributions from your plan.
However, for 2009 only, there is no minimum distribution requirement. This forced
distribution concept was established to eliminate the possibility of someone accumulating
huge amounts of money that continued to grow tax-deferred. The IRS has also established
rules to force you to take a minimum amount each year. This is called the Required Minimum
Distribution (RMD). There is a more detailed discussion of RMDs below. You can also take
more than the minimum. Withdrawals you take are subject to income taxes.
Distributions at death
The beneficiary designated as part of your IRA will determine whom the funds in your IRA
pass to when you die. This transfer is not governed by your will. If you designate your
estate as the beneficiary, funds would then be available to be distributed according to your
will. This is also the case if you have no designated beneficiary. That distribution
triggers the income taxation of the funds in the IRA.
If you designate your spouse or another person as the beneficiary, the IRA passes to that
person "intact" without being subject to income taxes. It then gets treated like that
person's IRA subject to the normal distribution requirements (pre-59 ½, 59 ½
to 70 ½ and after 70 ½).
Required Minimum Distributions
At age 70 ½, the IRS forces you to start taking withdrawals. The amount that must be
withdrawn is based on the life expectancy tables provided by the IRS. The rules for
determining how much you must take were simplified in early 2001. A uniform new life
expectancy table was adopted and generally provide for smaller RMDs. For 2009 only, there is
no minimum distribution requirement.
If you are currently required to take RMDs, you should consult your tax advisor to
determine how the new rules apply and whether you should make changes in your distribution
levels. These new rules are called "proposed" rules and technically do not apply until 2002.
However most experts believe they can be relied on for distributions during 2001.
Individual Retirement Accounts can be the foundation of a successful plan for a financially
secure retirement. Tax deferral on the earnings and the new beneficial rules for required
minimum distributions make these accounts even more attractive. Some of the rules are
complex, especially concerning distributions, and a thorough discussion with your tax
advisor can help you understand your options.