Although once intended to ensure that retirees had enough money to cover the basic necessities when they reached their Golden Years, Social Security payments have not kept up with inflation. In addition, fewer employers offer employer-sponsored pensions, leaving many workers tasked with funding their own retirement. For many people, this means contributing to an Individual Retirement Account (IRA). The Long Island estate planning attorneys at Eghrari Law Firm help you understand when you need to start taking distributions from an IRA and how much you are required to take out each year.
What Is an IRA?
An Individual Retirement Account (IRA) is a financial account that allows a worker to save money for retirement. Along with having designated retirement funds set aside, the benefit to creating an IRA is that the money you contribute is either tax-deferred or the growth is tax-free. With a traditional IRA you make pre-tax contributions, and that money grows in your IRA account until you take the money out during your retirement years. Taxes are paid when you take the money out, meaning it is tax deferred. Often, a retiree is in a lower income bracket when they retire, meaning you will pay less taxes on the income than you would have while you were working. A Roth IRA uses after-tax dollars, meaning income taxes have already been deducted. The money may grow tax-free, and you do not pay taxes on the money when you withdraw it as a retiree if certain conditions are fulfilled.
When Do I Have to Start Distributions from an IRA?
The rules related to distributions from an IRA and other retirement accounts are complex and subject to change. For these reasons, you should always consult with your financial advisor and your estate planning attorney before making any changes to an IRA, including the withdrawal of funds. The general rule, however, is that the owner of a traditional IRA must start taking withdrawals when he/she reaches age 72; however, if you reached age 72 after Dec. 31, 2022, you must start taking withdrawals at age 73. If you reach age 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for 2024. If you reach age 73 in 2023, you were 72 in 2022 and subject to the age 72 RMD rule in effect for 2022, meaning your first withdrawal is due by April 1, 2023, based on your account balance on December 31, 2021, and your second withdrawal is due by December 31, 2023, based on your account balance on December 31, 2022.
If your IRA is a Roth IRA, no distributions are required until the owner of the account dies. If the owner of an IRA dies, the entire balance of the account must be distributed within 10 years unless an exception applies.
What Is a Required Minimum Distribution?
Not only are there rules about when you must start making withdrawals from an IRA, but there are also rules about how much you must withdraw. At age 72 or 73 (whichever is applicable) you must also make the “Required Minimum Distributions (RMD)” each year. You can take out more than the RMD but not less each year. Keep in mind that if you have a traditional IRA, the money you withdraw is considered income and is taxed as such. Distributions from a Roth IRA are not taxed because the income was taxed prior to being used to contribute to the Roth IRA.
The RMD amount is calculated using the balance of your IRA account on December 31st of the previous year and dividing that amount by a life expectancy factor determined by the Internal Revenue Service (IRS). In other words, the idea behind a RMD amount is to allow the IRA to provide income for the life of the account owner.
Contact Long Island Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about when you need to start taking distributions from an IRA, contact the Long Island estate planning attorneys at Eghrari Law Firm by calling us at 631-265-0599 to schedule your appointment.
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