Most people entering their retirement years today started saving for retirement a long time ago after realizing that Social Security retirement benefits would not even cover their basic bills when they reached their “Golden Years.” One common retirement savings tool is an Individual Retirement Account, or IRA. If you have an IRA, you need to understand the rules for distributions from your IRA. To get you started, the Los Angeles retirement planning attorneys at Schomer Estate & Wealth Advisors discuss distribution rules for an IRA.
What Is an Individual Retirement Account?
An IRA, short for Individual Retirement Account, is a financial account that enables workers to save their own money for their retirement years. The reason people often choose to use an IRA to save money is that an IRA offers tax benefits that are not available when money is saved in a basic savings account. Specifically, either the contributions made to an IRA are tax-deferred or the growth of an IRA is tax-free. With a traditional IRA, you make contributions with pre-tax income, and the money grows within the account until it is withdrawn during retirement. When you withdraw the money from a traditional IRA is when the money is taxed. Because people are often in a lower tax bracket after they retire, they end up paying significantly less in taxes by deferring taxes until their retirement years. Conversely, a Roth IRA involves contributions made with after-tax dollars, meaning income taxes have already been deducted. That money, however, grows tax-free until you reach retirement age. At that time, you can withdraw the money tax-free (subject to meeting certain conditions).
What Is an IRA Required Minimum Distribution?
The Internal Revenue Service (IRS) has rules in place that dictate when you must start withdrawing money from an IRA as well as how much you have to withdraw. Once you reach the age at which you must start taking distributions, you are required to make the “Required Minimum Distributions (RMD)” each year. While you can withdraw more than the RMD amount, you are not allowed to withdraw less. If you are withdrawing money from a traditional IRA, the amount withdrawn is part of your taxable income for the year whereas money withdrawn from a Roth IRA is not considered taxable income. Remember, contributions to a Roth IRA are made with money that has already been taxed so it is not taxed a second time when you withdraw it.
The RMD amount is determined by calculating the balance of your IRA account on December 31st of the preceding year and dividing it by a life expectancy factor determined by the IRS in an effort to ensure that your IRA provides you a reliable income source for your entire lifetime.
When Do Required Minimum Distributions Have to Begin?
Knowing when you are required to begin taking RMD from your IRA account is essential, both to your budget and to ensure that you are in compliance with the IRS rules. Consult with your financial advisor and your estate planning attorney on a regular basis because the rules about RMD may change. As of 2023, however, 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.
Roth IRAs are handled differently than a traditional IRA when it comes to distributions. No distributions are required during the lifetime of the account holder. If you own a Roth IRA, however, the remaining balance at the time of your death must be distributed within ten years. Of course, there are exceptions to this general rule so, once again, consult with your financial advisor and your estate planning attorney.
Contact Our Los Angeles Retirement Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about the distribution rules for an IRA, contact the experienced Los Angeles retirement planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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