Because workers can no longer rely on employer-sponsored pensions or on receiving sufficient Social Security retirement benefits, most workers start saving for retirement early on in life. One popular vehicle used to save for retirement is an Individual Retirement Account, or IRA. If you own an IRA, you will eventually need to start taking distributions from the account. To make sure you remain in compliance with the applicable laws, a Grand Forks attorney at German Law helps you understand the IRA minimum distribution rules.
What Is an Individual Retirement Account?
As the name implies, an Individual Retirement Account (IRA) is a financial account used by individuals to save money for their own retirement. The primary types of IRAs available to individuals are a traditional IRA and a Roth IRA. Both types of IRAs offer tax benefits that make them preferable to a basic savings account for retirement saving purposes. The difference between the two IRA options can be found in when the money held in the account is taxed.
Contributions made to a traditional IRA are made with pre-tax income which results in a reduction of your taxable income for the year in which the contributions are made. The money grows within the account tax-deferred until retirement. As you withdraw money during retirement, the value of the distributions is taxed as income at the tax rate applicable at that time. This often results in a tax savings because retirees are often in a lower tax bracket than they were when the income was put into the account. As such, you will pay less in taxes on the withdrawals than you would have had the money been taxed when it was originally moved into the account.
By contrast, contributions to a Roth IRA are made with after-tax dollars, meaning taxes have already been paid on the money. The money in a Roth IRA then grows tax-free until you reach your retirement years. Withdrawals are then tax-free, subject to certain conditions, because the money was taxed before it was deposited into the account.
What Is an IRA Required Minimum Distribution?
An IRA Required Minimum Distribution (RMD) is a rule established by the Internal Revenue Service (IRS) that determines when and how much money you must withdraw from your IRA. Once you reach the age at which RMDs begin, you are obligated to take the minimum required amount out of your IRA each year. While you can withdraw more than the RMD amount, you must ensure that you withdraw at least the minimum specified by the IRS. Keep in mind that if you own a traditional IRA, the amount withdrawn is considered taxable income, whereas withdrawals from a Roth IRA are not taxable since contributions have already been taxed.
The RMD amount is calculated based on the balance of your IRA account on December 31st of the previous year and a life expectancy factor provided by the IRS. This calculation aims to ensure that your IRA provides a steady income throughout your retirement years. Properly managing your IRA and adhering to RMD rules are crucial to maximizing the benefits of your retirement savings.
Individual Retirement Account Required Minimum Distribution Rules
To ensure compliance with the IRS rules, as well as for your own budgetary concerns, you need to understand the RMD rules.
As of 2023, 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.
If you own a Roth IRA, the general rule is that no distributions are required during the lifetime of the account holder, but the balance remaining at the time of your death must be distributed within ten years. There are exceptions to this general rule, however, which highlights the need to consult with a financial advisor as well as your estate planning attorney when it comes time to retire.
Do You Need Help with Retirement Planning?
Please join us for an upcoming FREE seminar. If you need help with retirement planning, contact the Grand Forks attorneys at German Law by calling 701-738-0060 to schedule an appointment.
- Why a Pre-Paid Funeral Contract Might Not Be the Best Option - December 7, 2023
- The SECURE Act – the Gift That Keeps On Giving - December 5, 2023
- How Does My Age at Retirement Impact My Social Security Benefits? - November 30, 2023
