Financial Care for Life > IRA Income Distribution
IRA Income Distribution
Understanding Traditional IRA Distributions
Unfortunately, many people withdraw money from their traditional Individual Retirement Accounts (IRA) without fully understanding the consequences of their distribution. Below, we have provided several important items to know that will help you avoid any IRA distribution pitfalls.
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Knowing When You Can and Can’t Begin Making IRA Withdrawals
As implied by its name, a traditional IRA (Individual Retirement Account) is to be used during retirement. Once you turn 59.5 years old, you can begin penalty-free withdrawals. You can also defer a bit longer if desired. Effective January 1, 2020, the IRS requires individuals who turn 70.5 years old in 2020 or later to begin taking distributions no later than April 1 of the calendar year after they turn 72.
Understanding Penalties and Exceptions
It is possible to withdraw funds if you’re working or retired. However, regardless of your age or if you’re working or not, the money withdrawn will be taxed as ordinary income. Additionally, you may be assessed with an additional 10% early withdrawal penalty if you’re not yet 59.5 years old at the time you draw out of your IRA.
The IRS does offer some exceptions to the early withdrawal penalty. If you’re a qualified first-time homebuyer (with withdrawals not exceeding $10,000) or if you need to pay medical insurance premiums while unemployed, the IRS may alleviate the 10% early withdrawal penalty. A few other exceptions are also available including payment for qualified higher education expenses and distributions for military reservists who have been called into active duty.
Determining Your Timeline and Potential Tax Implications
There are set timelines and potential tax implications established for your required distributions. You’re required by the IRS to withdraw money annually no later than December 31st beginning the calendar year following your 72nd birthday. As a result, if you reach the age of 72 on June 30, 2022 and choose to defer your initial withdrawal until April 1, 2023, you’ll be required to take a second distribution later that year and both withdrawals will be taxed on your 2024 returns. To avoid this, a better option is to take the initial withdrawal in the same calendar year you turn 72.
Meeting the Annual Required Withdrawal Amount
For each year after your required beginning date, you must withdraw a certain amount of your IRA each and every year. Also known as the required minimum distribution (RMD), the IRS provides a worksheet on its website to help you determine this minimum amount. You can always take more than the RMD but if you don’t meet or skip it, you’re subject to a 50% excise tax on the amount you neglected to withdraw.
We understand that managing your IRA distributions and withdrawals can be complex. That’s where we can help. The KIG advisor team will walk you through the details and ensure you’re getting the most out of your retirement.