Traditional Individual Retirement Annuity IRA Distributions: When Must They Start?

Planning for retirement involves not only saving but also understanding when and how to withdraw funds. For those with a traditional Individual Retirement Annuity (IRA), knowing the rules around required distributions is essential to avoid penalties and ensure financial stability.

The timing of these withdrawals follows specific regulations that affect tax obligations and long-term income planning. Understanding these requirements helps retirees make informed decisions.

Distribution Start Requirements

Withdrawals from a traditional IRA must begin once the account holder reaches a specific age, as mandated by federal law. The SECURE 2.0 Act of 2022 raised the Required Minimum Distribution (RMD) age to 73 for individuals who turn 72 after December 31, 2022. This threshold will increase to 75 in 2033. Missing these withdrawals can result in tax penalties, making it important to track deadlines.

The first RMD must be taken by April 1 of the year following the year the account holder reaches the required age. For example, if someone turns 73 in 2025, their first withdrawal must occur by April 1, 2026. However, delaying the first distribution means taking two withdrawals in the same tax year, which could push the individual into a higher tax bracket. After the first withdrawal, all subsequent RMDs must be taken by December 31 each year.

Determining Distribution Amounts

The amount that must be withdrawn each year depends on the account holder’s age, life expectancy, and IRA balance. The IRS provides guidelines to calculate RMDs, ensuring funds are withdrawn gradually.

Age and Life Expectancy

The IRS uses life expectancy tables to determine annual withdrawal amounts. The most commonly used table for IRA owners is the Uniform Lifetime Table, which applies unless the sole beneficiary is a spouse more than 10 years younger.

For example, if an account holder is 75 years old, the Uniform Lifetime Table might assign a life expectancy factor of 24.6. To calculate the RMD, the IRA balance as of December 31 of the previous year is divided by this factor. If the balance was $500,000, the RMD would be:

500,000 ÷ 24.6 = 20,325.20

This amount must be withdrawn by December 31 of the current year. The life expectancy factor decreases each year, meaning the percentage of the account that must be withdrawn increases over time.

IRA Balances

The total IRA balance at the end of the previous year determines the RMD. This includes all assets held within the account, such as cash, stocks, bonds, and annuities. If an individual has multiple IRAs, the RMD is calculated separately for each but can be withdrawn from any one or a combination of them.

For instance, if someone has two IRAs—one with a balance of $300,000 and another with $200,000—the total RMD is based on the combined $500,000 balance. However, they can choose to withdraw the full amount from one account or split it between both. This flexibility allows retirees to manage their investments strategically.

Market fluctuations also impact RMD calculations. If the IRA balance declines due to investment losses, the required withdrawal amount will be lower in the following year. Conversely, if the balance grows, the RMD will increase. Monitoring account performance and adjusting withdrawal strategies accordingly can help maintain financial stability.

Annuity Payout Tables

For those who have purchased an annuity within their IRA, RMD calculations may differ depending on the type of annuity. If the annuity is in the accumulation phase, standard life expectancy tables apply. However, once annuity payments begin, the RMD is based on the annuity payout schedule rather than the standard divisor method.

For example, if an individual has a fixed annuity that guarantees $25,000 in annual payments, this amount satisfies the RMD requirement if it meets or exceeds the calculated minimum. If the annuity payout is lower than the required amount, additional withdrawals from other IRA assets may be necessary.

Certain annuities, such as Qualified Longevity Annuity Contracts (QLACs), allow a portion of the IRA balance to be excluded from RMD calculations until payouts begin, typically at age 85. This can be a useful strategy for deferring taxable income and ensuring a steady income stream later in retirement.

Penalties for Missed Distributions

Failing to take the required minimum distribution (RMD) results in tax penalties. The SECURE 2.0 Act reduced the penalty from 50% to 25% of the missed distribution, and it can be further reduced to 10% if corrected in a timely manner. To qualify for the lower penalty, the full RMD must be taken and Form 5329 must be filed with the IRS before the end of the second year following the missed distribution.

For example, if an individual was required to withdraw $20,000 but failed to do so, they could face a penalty of $5,000 (25% of the missed amount). If they correct the mistake within the allowable window, the penalty could be reduced to $2,000 (10%). If they fail to address the issue, the IRS could assess additional interest and penalties.

IRA custodians do not automatically notify the IRS of noncompliance, so account holders must track their withdrawals. If an RMD is missed, Form 5329 must be filed separately from the tax return to report the error and request a penalty waiver. The IRS may grant relief if the shortfall was due to a reasonable error, such as a serious illness or a miscalculation by the financial institution. Proper documentation, including a letter explaining the circumstances, increases the likelihood of a waiver being approved.

Annuity-Based IRA Payout Options

Choosing an annuity within an IRA provides structured income, but the payout structure depends on the type of annuity selected. Fixed annuities offer predictable payments based on a set interest rate, ensuring stability. Variable annuities fluctuate based on investment performance, introducing the possibility of higher returns but also greater risk. Indexed annuities blend aspects of both, linking returns to a market index while typically including a minimum guaranteed payout.

The method of annuitization also affects how distributions are received. A life-only annuity provides the highest possible periodic payments but ceases upon the annuitant’s death, leaving nothing for heirs. Joint and survivor annuities continue payments to a spouse or designated beneficiary at a reduced percentage, ensuring ongoing income for a surviving partner. Period-certain annuities guarantee payments for a specified number of years, regardless of whether the annuitant is still living, which can be useful for estate planning.

Tax Reporting Considerations

Withdrawals from a traditional IRA are subject to federal income tax and must be reported properly. These distributions are taxed as ordinary income and must be included on the account holder’s annual tax return. Financial institutions report all withdrawals on Form 1099-R, which details the total amount distributed and whether any taxes were withheld.

Taxpayers must report this information on Form 1040. If taxes were not withheld at the time of withdrawal, individuals may need to make estimated tax payments throughout the year to prevent underpayment penalties. The IRS allows account holders to request withholding at a flat rate, typically 10%, but this can be adjusted based on personal tax liability. Those with significant IRA balances may benefit from tax planning strategies, such as spreading withdrawals over multiple years to avoid higher tax brackets.

If an RMD was missed but later corrected, Form 5329 must be filed to report the shortfall and request a penalty waiver if applicable. If an individual donates their RMD directly to a qualified charity through a Qualified Charitable Distribution (QCD), up to $100,000 per year can be excluded from taxable income, reducing overall tax liability. Proper documentation of these transactions is necessary to ensure compliance and maximize tax efficiency.