We have noticed that the rules about IRA account withdrawals cause some confusion, particularly among those who are approaching age 70. This article will cover the basics for most people. It is not intended to be advice or a recommendation for your specific situation.
For traditional or rollover IRA account owners, withdrawals after age 59 ½ are free of penalty but income taxes must be paid on the amounts withdrawn. One may withdraw money or not, in accordance with their needs and plans. Beginning at age 70 ½, the rules change a little.
For each year beginning with the year you turn 70 ½, a “Required Minimum Distribution” (RMD) must be withdrawn. ‘Required’ means there is no option about it, it must be done. ‘Minimum’ means that at least the calculated amount must be withdrawn, but you may withdraw more if you choose. ‘Distribution’ is simply the word the IRS uses for withdrawals.
The way the numbers work, the RMD starts out a little under 4% of the account balance at age 70, then rise gradually each year to a little over 5% at age 80 and close to 10% by age 92. The withdrawals will be taxable—that is the whole object of the exercise. You can see that with those requirements, IRA accounts may still have significant balances until advanced ages.
Here are just a few fine points:
- The calculation begins with the prior year-end balance.
- The factor used comes from an IRS table, and we will do the arithmetic for you.
- The withdrawal may be made any time in the calendar year.
- The first time only, you may delay until April 1st of the following year—but if you do, you will also need to withdraw for the second year in the same year—so income will be bunched up.
- If you have multiple IRA accounts, you may take the RMDs from whichever accounts you prefer, as long as the total requirement is met.
Our object for each client is to have money do what people need it to do. So the question of how you should manage your accounts and your withdrawal strategy is best answered in a one-on-one discussion. If you would like our help, please call or email us. The IRS publication about RMDs is available online here
Different rules apply to inherited IRAs, Roth IRAs, and certain other situations. Check with your advisor about your situation.