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often pay little attention to how funds can be withdrawn from the accounts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 Tradtional 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.
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The general rule is that funds withdrawn from an IRA qualified plan before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.
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 possible.
age 70 ½
After you reach age 70 ½, you must start taking distributions from
your plan. 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.
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).
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
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.