Breaking the Code: Retirement Account Distribution
By: Connor Lardi, Tax Intern
With tax reform in recent years causing near constant changes, it’s never been more difficult to track up-to-date requirements, dates, and age limitations for retirement account distributions. Making the most of your retirement savings hinges on having access to your fund accounts, which makes it imperative to understand the distributions of various retirement accounts - specifically traditional IRAs, Roth IRAs, and inherited accounts.
Traditional IRAs or Other Pre-Tax Retirement Accounts
Contributions to Traditional IRAs are typically tax-deductible, lowering your income in the year contributed. This benefit means that withdrawals during retirement are taxed as ordinary income at the marginal tax rate in the year withdrawn.
Individuals are required to start taking annual Required Minimum Distributions (RMDs) between the ages of 73-75, depending on when you were born. RMDs mandate individuals to withdraw minimum amounts from their retirement account each year. RMDs are calculated using an actuary formula based on your age and IRS life expectancy tables. Though some situations allow for a delay in RMDs, if they are not taken annually, penalties and excise taxes are incurred.
Roth IRAs or Other Post-Tax Retirement Accounts
Contributions to Roth IRAs are made with post-tax dollars, which means you do not receive any immediate tax benefit. Instead, a key advantage lies in the qualified distributions, which are generally tax-free in retirement. This includes both the contributions you made and any earnings the account has generated.
Unlike traditional IRAs, no RMDs are required for post-tax Roth accounts- we like these!
Inherited IRAs
How do these same distributions work if the account is inherited from someone else?
It depends! There are many unique situations with inherited IRAs and complex rules to go along with them. If you have any questions about your specific situation, reach out to a member of your tax team to talk it through
Planning for RMDs
As of April, the IRS has waived RMDs for inherited IRAs through the rest of 2024.
Individuals can also opt to make Qualified Charitable Distributions (QCDs) to cover a portion or all of their RMD. This means that instead of distributing the withdrawal to themselves, the amount is directly donated to a qualified charity. Starting in 2024, IRA account holders aged 70 ½ and older can now make QCDs of up to $105,000 dollars annually. These qualified charitable distributions can be used to satisfy part or all of your IRA minimum distribution that is required.
Income timing or spreading with Roth conversions in the years leading up to RMDs or during retirement, depending on individual situation.
Contact a member of your tax team with any questions; we would be happy to discuss them with you.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.