Traditional IRA withdrawals are taxed, while contributions to Roth IRAs can help lower income tax liabilities during retirement.
Most commonly, individuals withdraw money from their IRA for unreimbursed medical expenses or health insurance premiums that cannot be covered through insurance or reimbursement plans. There may also be other valid reasons; depending on your age and purpose of withdrawals. There are tax rules associated with them.
Taxes on IRA withdrawals
Your tax burden when withdrawing funds from an IRA after retirement depends on its type, your age and purpose of withdrawal. In general, income tax will apply on money taken out unless one of the exemptions specified by the IRS apply.
Traditional IRA withdrawals are subject to income tax at your marginal rate and early withdrawals incur a 10% penalty tax, while Roth IRA withdrawals tend to be tax-free since contributions were made using after-tax dollars.
Once you reach age 59 1/2, required minimum distributions (RMDs) from your traditional IRA are mandatory. This rule takes into account that eventually you may move up in tax bracket and to ensure your funds are used solely for retirement-related needs; exceptions exist however for first-time home purchases, qualified adoption expenses and certain long-term unemployment costs.
Taxes on Roth IRA withdrawals
The IRS has set forth specific rules on withdrawing money from an IRA, with rules depending on its type and age requirements. Typically, to avoid paying taxes or penalties when withdrawing investment earnings without incurring penalties early withdrawals may be made prior to reaching age 59 1/2; however there are exceptions which permit early withdrawals without incurring charges or taxes.
Withdrawals from traditional IRAs are taxed at ordinary income tax rates because the funds were contributed before taxes were taken out, as well as being subject to an early withdrawal penalty of 10% which is designed to discourage people from accessing their retirement funds for non-retirement related purposes.
Roth IRA withdrawals are tax-free as they’re made using post-tax dollars, though you must wait at least five years before withdrawing them. You could also opt to make substantially equal periodic payments using an IRS-approved formula; such payments must last either for at least five years or until age 59 1/2, whichever comes first.
Taxes on traditional IRA withdrawals
After retirement, IRA withdrawal rules can be complex and sometimes confusing. To maximize value from your retirement savings account, it is vitally important that you understand these regulations and make smart choices to get the most out of them.
Traditional IRA withdrawals are taxed as regular income upon retirement; Roth IRA withdrawals typically don’t incur tax liabilities as these accounts were funded with after-tax dollars. Any early withdrawals are subject to an early withdrawal tax of 10% unless an exception applies.
Keep in mind that the tax implications of an IRA withdrawal will depend on both your current income level and current tax rates. If you expect to be in a lower tax bracket once retired, taking regular distributions could make more financial sense than delaying them, though this could result in higher long-term taxes. Consult a Thrivent financial advisor about your specific needs so that you can maximize the potential advantages offered by an IRA.
Taxes on in-kind distributions
As you near age 73, it is time to begin taking required minimum distributions (RMDs) from your traditional IRA. But rather than liquidate shares for cash distributions, an in-kind RMD allows you to maintain your investments within an account broker.
In-kind distributions may help you sidestep the 10% early withdrawal penalty applicable to traditional IRAs. Furthermore, you could use proceeds from such distributions for unreimbursed medical expenses, first-time home purchases or qualified higher education expenses.
But be wary when using in-kind distributions from an IRA to purchase prohibited investments such as real estate or gold bullion; doing so could trigger unrelated business taxable income (UBTI). Furthermore, when giving to charities directly through in-kind distributions from your IRA account to another recipient will count as qualified charitable distribution (QCD). Fortunately, most custodians offer support in calculating your RMD and facilitating its transfer.
