When you save money in an IRA, you get a benefit in the form of a tax deduction that reduces your liability come tax time. Unfortunately, all good things must come to an end, and these taxes are merely deferred: when you take distributions from your IRA, it gets taxed as income.
To make sure that the IRS gets its share, IRA owners are required to take out a percentage of their account value each year starting at age 72. This “required minimum distribution” (RMD) starts out around 4% and slowly grows with age according to life expectancy tables.
Beneficiary IRAs are also subject to RMDs, regardless of age. (The IRS has a vested interest in seeing that they are drained. They designed IRAs to help taxpayers fund retirement, not to sock away generational wealth with impunity.)
There has been some confusion about RMD rules in recent years because of multiple rule changes, including the requirement being waived altogether for 2020. There are no signs that Congress intends to waive RMDs for a second year, so anyone who is 72 or older by the end of 2021 will need to take out an RMD by December 31.*
No matter when your birthday is, you get complete discretion on when to take out your RMD. Some prefer to put it off as long as possible to keep the money at work in the market; some would just as soon have it in their pockets at the start of the year. It is up to you.
One notable exception for IRA holders: Roth IRAs do not have any mandatory RMDs. A Roth is funded with after-tax money, so the IRS has no interest in how you take money out or leave it in. If you are still saving up and counting down days until retirement, this is one advantage of a Roth that you should take into consideration.
Clients, if you want to talk about your RMD, please call or email us.
*Those turning 72 this year get a one-time extension and can put off their very first RMD until Tax Day next year, though we generally do not recommend this: these folks will still need to take 2022’s RMD out by the end of next year, so doubling up on distributions will create a lumpy tax bill.
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A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.