IRA Distributions & Withdrawals

What is an IRA Distribution?

An IRA distribution describes a withdrawal of cash and/or assets from an IRA. Distributions can be taken at any time. The type of IRA will determine whether there are taxes and penalties associated with distributions. Below are the two methods of distribution:

Cash Distributions - When an IRA holder requests a cash amount to be distributed from the account and sent via check, ACH, or wire directly into their hands. This method of distribution can be used for the full distribution or partial distribution of the IRA cash balance.

'In-kind' Distributions - Used to distribute non-cash assets from an IRA without selling these assets. This method of distribution changes the ownership of the asset from the IRA’s name to the name of the IRA holder. This type of withdrawal may be used for illiquid assets like real estate and private placements. The custodian must report the asset’s Fair Market Value (FMV) to the IRS to determine the dollar value of the distribution. 

For cash and in-kind distributions, IRS Form 1099-R reports the distribution to the IRS.

Once a traditional IRA holder reaches age 73, they must withdraw a certain amount from the retirement account each year. That amount is called a Required Minimum Distribution, or RMD.

A required minimum distribution (RMD) is the minimum amount that an IRA owner must withdraw yearly, starting with the year that he or she reaches age 73. This rule applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, and Individual 401(k) plans.

Failure to take any portion of the minimum amount will incur a 25% penalty on the portion failed to be distributed. For 401(k) holders, failing to take an RMD could be cause for plan disqualification.  

Keep in mind, the amount that must be withdrawn changes each year. The amount is based on a formula using the age of the individual for the year and the prior year-end account balance. The RMD of each retirement plan must be calculated separately. However, if the account is an IRA, the RMD may be satisfied by a distribution from another IRA.

The typical deadline for taking RMDs is December 31 of each year. If it is the IRA holder’s first RMD, the distribution deadline can be extended until April 1 of the following year after they turn 73. However, if the IRA holder delays taking their first RMD, they must take two RMDs in the following year.

For example, if an IRA holder turns 73 in 2024, they do not have to take their first RMD until April 1, 2025. However, they will be required to take their second RMD by December 31, 2025.

Note: Taking more than the RMD will not reduce the amount of the following year’s RMD.

Important Tips:

• If your spouse is the only primary beneficiary to your account and is more than ten years younger than you, you must use the IRS Joint Life and Last Survivor Expectancy Table (Table II in IRS Publication 590). Using this table will yield the smallest amount.
• You're not required to take RMDs from a Roth IRA. However, the RMD rules will apply to beneficiaries that inherit your Roth IRA when you die.
  
  

How to Calculate Your Required Minimum Distribution

The simplest way to calculate your RMD is to use the RMD Calculator from the U.S. Securities and Exchange Commission.

If you’d prefer to do it yourself, first determine the adjusted market value of your IRAs as of December 31 of the preceding year. Next, divide that figure by the life expectancy figure corresponding with your age under the Uniform Lifetime Table [Table III in IRS Publication 590, Individual Retirement Arrangements (IRAs)]. 

The relevant age is what you would attain on your birthday during the year. If your spouse is the sole beneficiary and is more than 10 years younger than you, you may use the Joint Life and Last Survivor Expectancy Table (Table II in IRS Publication 590). In general, using this table as opposed to the Uniform Lifetime Table will reduce the amount required. 

For Individual 401(k) plans, the plan sponsor is responsible for calculating and distributing the RMD from the plan. Failure to distribute the RMD for plan participants will jeopardize the plan’s qualified status.

After the SECURE Act of 2019, many beneficiaries were confused whether life expectancy payments needed to continue during the 10-year period. In July 2023, the IRS published Notice 2023-54, clarifying the requirements. The notice confirms that non-eligible designated beneficiaries of IRA holders who died after their required beginning date in 2019 must take life expectancy payments and empty the account within the 10-year period.

If you missed an RMD in 2020, 2021, or 2022 due to this confusion, you won't be penalized. However, you will be penalized if you did not take the deceased IRA holder’s RMD in the year of their death.

What penalties will I face if I don’t take my RMD?

IRA holders will be subject to a 25% penalty for any amount failed to be distributed.

Example: If your RMD is $5,000.00 and you only distributed $4,000.00, you will have a penalty of $250.00. This is 25% of the $1,000 you did not distribute.

Certain investments that are hard to liquidate may be an issue when it comes to taking an RMD. Although taking an in-kind distribution may be an option, it can be difficult and sometimes costly.

Option 1: Pay the 25% penalty. By paying the penalty using IRS Form 5329 and completing Section 9, the RMD does not have to be distributed for the year.

Option 2: Convert assets from their traditional, SEP, and SIMPLE IRAs to a Roth IRA.

Note: Roth IRAs can only be funded with post-tax savings, so this conversion will require you to pay income taxes on the amounts converted. Additionally, if there is an outstanding RMD, it must be satisfied before converting the assets.

Includes traditional, SEP, and SIMPLE IRAs.

The contributions you make to your IRA are intended to supplement your income during your retirement years. However, as much as you would like to let your IRAs remain untouched until retirement, unforeseen expenses may force you to distribute some of those assets prematurely. Should you decide to take an early distribution from your IRA, these amounts may be subject to federal and state taxes.

If you are younger than 59½...

If you take a distribution, you may be assessed an additional 10% early distribution penalty on any taxable amount. The IRS imposes this penalty to deter individuals from taking premature distributions from their retirement accounts. The penalty may be waived for the following exceptions:

If you are older than 59½...

Once you reach age 59½, you can withdraw funds from your traditional IRA without restrictions or penalties. But keep in mind that your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income.

If you are older than 73...

Beginning in the year you turn 73, you must start taking an annual Required Minimum Distribution (RMD) from your traditional IRA. If you don’t make withdrawals, you’ll have to pay a 25% penalty on the amount you should have withdrawn.

Important update for 72 and 73 year-old IRA holders: In late 2022, the Secure Act 2.0 raised the RMD age from 72 to 73. However, many IRA holders who turned 72 in 2023 still took an RMD, believing that it was required. In July 2023, the IRS published Notice 2023-54, allowing these IRA holders who took an unnecessary RMD to roll the funds back into their IRA without penalty.

If you turned 72 in 2023 and took an RMD between January 1, 2023 and July 31, 2023 because you didn’t realize the RMD age had gone up, you have until September 30, 2023 to roll the funds back into your account. This rollover is permitted even if you completed a rollover within the last 12 months. However, it does prevent you from completing another rollover in the next 12 months.

For the most part, Roth IRA withdrawal rules are more flexible than those for a 401(k) or even a traditional IRA. Because you already paid taxes on the money you’ve contributed to a Roth IRA, you can withdraw your contributions at any time, without tax and penalty. The keyword here is contributions — the money you put into the account. Different rules apply to conversion amounts and investment earnings.

If you are under the age of 59 ½, amounts converted must satisfy a five-year period to avoid being subject to the 10% penalty.

To distribute investment earnings without owing income taxes and a 10% penalty, you’ll have to meet specific criteria. You must meet one of the following reasons: attaining age 59 ½, death, disability, or a first-time home buyer (maximum $10,000) as well as you must have satisfied the 5-year period.

The 5-year period means it's been five years since you contributed to your first Roth IRA. The clock for the five-year period begins as of January 1 of the year for which a contribution was made. As an example, if you made a contribution in July of 2023, the clock started as of January 1, 2023.

If you are younger than 59½ and have had your account for less than 5 years...

Generally, you’ll owe income taxes and a 10% penalty if you withdraw earnings from your account. You can avoid the penalty, but not the income taxes, if you meet one of the following exceptions:

• You’re withdrawing up to $10,000 as a qualified first-time home buyer.
• The withdrawal is for qualified education expenses.
• The withdrawal is for unreimbursed medical expenses in excess of 7.5% of your adjusted gross income for the year.
• The withdrawal is for health insurance premiums while you’re unemployed.
• The withdrawal is due to disability.
• The withdrawal is made to a beneficiary or your estate after your death.
• You decide to take substantially equal payments. Essentially, this locks you into taking at least one distribution per year for at least five years or until you turn 59½, whichever comes later.
• The withdrawal is due to an IRS levy.
• You made the withdrawal when you were a qualified reservist.
  
  

If you are younger than 59½ and have had your account for more than 5 years...

You can avoid taxes and penalties on earnings you withdraw from your account if you meet one of the following exceptions:

• You’re withdrawing up to $10,000 to buy your first-time home.
• The withdrawal is due to disability.
• The withdrawal is made to a beneficiary or your estate after your death.
  
  

If you are older than 59½ and have had your account for less than 5 years...

You’ll owe income tax but no penalty on earnings that you withdraw.

If you are older than 59½ and have had your account for more than 5 years...

You can withdraw earnings with no tax nor penalty.