If you have been saving for your retirement, there is a good chance you have included an Individual Retirement Account (IRA) among your retirement planning tools. There are numerous rules associated with IRAs, including rules that dictate when you must begin taking money out of the account. To help make sure you are in compliance, the attorneys at Wilcox Attorneys, PA explain required minimum distributions from an IRA.
What Is an Individual Retirement Account?
An Individual Retirement Account (IRA) is a financial account that helps individuals save money for their retirement years. While there are variations of the two, the primary types of IRA are a traditional IRA and a Roth IRA with the primary difference being when money in the account is taxed.
Pre-tax dollars are used to make contributions to a traditional IRA. The money then grows until it is withdrawn during retirement, at which time the money is taxed as income. Because your income bracket after you retire may be lower than it is when you deposit money in the IRA you benefit from a tax-savings. A traditional IRA is considered a tax-deferred account because taxes on the money are deferred until your retirement years.
After-tax dollars are used to contribute money to a Roth IRA. Money in a Roth IRA also grows tax-free; however, because the money has already been taxed it is not taxed when you make withdrawals during your retirement years.
What Is an IRA Required Minimum Distribution?
The Internal Revenue Service (IRS) has established required minimum distribution (RMD) rules for IRAs. As the name suggests, RMD rules dictate when and how much money you must withdraw from your IRA.
Once you reach the age at which RMDs begin, you are obligated to take the minimum required amount out of your IRA each year. Although you can always withdraw more than the RMD amount, you must withdraw at least the minimum required by the IRS rules. If you are withdrawing money from a traditional IRA, the money will be taxed as income. Money withdrawn from a Roth IRA has already been taxed, therefore it is not treated as income for tax purposes.
The RMD amount is calculated based on the balance of your IRA account on December 31st of the previous year and a life expectancy factor provided by the IRS. Ensuring that your IRA provides a steady income throughout your retirement years is the goal.
Individual Retirement Account Required Minimum Distribution Rules
As of 2023, you must begin taking RMD at age 72 if you own a traditional IRA, but if you reached age 72 after December 31, 2022, the mandatory withdrawals must begin at age 73. If you reach age 72 in 2023, your first Required Minimum Distribution (RMD) is due by April 1, 2025, for the year 2024. If you turn 73 in 2023, you were 72 in 2022 and subject to the age 72 RMD rule in effect for 2022. Therefore, your first withdrawal was due by April 1, 2023, based on your account balance on December 31, 2021. Your second withdrawal is due by December 31, 2023, based on your account balance on December 31, 2022.
If you own a Roth IRA, the general rule is that no distributions are required during the lifetime of the account holder, but the balance remaining at the time of your death must be distributed within ten years. There are exceptions to this general rule, however, which highlights the need to consult with a financial advisor as well as your estate planning attorney when it comes time to retire.
Do You Have Questions about Required Minimum Distributions from Your IRA?
For additional information, please sign up for one of our FREE estate planning webinars. If you wish to discuss distributions from your IRA, contact the experienced Washington County, Fayetteville, Springdale, Rogers, Bentonville, and Northwest Arkansas estate planning attorneys at Wilcox Attorneys, PA by calling 479-443-0062 to schedule your appointment today.
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