What Are the Rules for Cashing Out an IRA After 70?
In your 70s, specific guidelines govern IRA withdrawals. Learn how to manage your distributions correctly and understand their full financial impact on your retirement.
Accessing funds from an Individual Retirement Arrangement (IRA) after reaching age 70 marks the point where years of tax-deferred savings begin to be distributed. Navigating this phase involves understanding the federal rules that govern how and when you must start taking withdrawals from your retirement accounts. These regulations are designed to ensure that the tax-deferred benefits of these accounts do not extend indefinitely.
The Rules of Required Minimum Distributions
A Required Minimum Distribution (RMD) is the amount you must withdraw annually from certain retirement accounts once you reach a specific age. These rules apply to Traditional IRAs, SEP IRAs, and SIMPLE IRAs. The purpose of the RMD is to ensure that individuals pay taxes on these tax-deferred savings.
The SECURE 2.0 Act of 2022 adjusted the RMD starting age. For individuals born between 1951 and 1959, the age to begin taking RMDs is 73. For those born in 1960 or later, the starting age will increase to 75, a change that takes effect in 2033.
The deadline for your first RMD is April 1 of the year after you reach the mandated age. For example, an individual who turns 73 in 2024 must take their first RMD by April 1, 2025. All subsequent RMDs must be taken by December 31 of each year. Original owners of Roth IRAs are not required to take RMDs during their lifetime. As of 2024, this RMD exemption also applies to Roth accounts held within employer-sponsored retirement plans, such as Roth 401(k)s.
How to Calculate Your RMD
To determine your RMD for a given year, you need two pieces of information. The first is the fair market value of your IRA on December 31 of the preceding year. The second is your age as of the end of the distribution year.
The primary tool for the calculation is the Uniform Lifetime Table, provided by the IRS in Publication 590-B. To use the table, you find your age for the distribution year, which corresponds to a specific “distribution period” or life expectancy factor. This factor represents the average number of years a person of that age is expected to live. The RMD is then calculated by dividing the prior year-end account balance by this distribution period.
For instance, if an individual is 76 years old and their IRA balance was $262,000 on December 31 of the previous year, they would look up age 76 on the Uniform Lifetime Table. The table shows a distribution period of 23.7 for that age. The RMD for the year would be $11,054.85, which is calculated by dividing $262,000 by 23.7. While most IRA custodians will calculate this amount for account holders, the ultimate responsibility for taking the correct RMD rests with the individual.
Tax Implications of IRA Withdrawals
The tax treatment of withdrawals from an IRA depends on the type of account: Traditional or Roth. For a Traditional IRA, where contributions are typically made with pre-tax dollars, all withdrawals are treated as ordinary income. This means the withdrawn amount is added to your total income for the year and taxed at your applicable federal income tax rate.
If you have made non-deductible (after-tax) contributions to your Traditional IRA, a portion of your withdrawal will be tax-free. This is determined by the pro-rata rule, which calculates the ratio of non-deductible contributions to the total IRA balance. You must file Form 8606, Nondeductible IRAs, to track these contributions and calculate the taxable portion of your distributions.
Conversely, qualified distributions from a Roth IRA are entirely tax-free. A distribution is considered “qualified” if two conditions are met: the account has been open for at least five years, and the owner is over age 59 ½. Regardless of the IRA type, your custodian will report the gross distribution amount to you and the IRS on Form 1099-R.
Penalties for Failing to Take an RMD
Failing to take your full RMD by the annual deadline results in a penalty. The IRS imposes an excise tax on the amount that was required to be withdrawn but was not.
Under the rules established by the SECURE 2.0 Act, the penalty is 25% of the RMD shortfall. The penalty can be further reduced to 10% if the individual corrects the mistake by withdrawing the required amount within a specific “correction window,” which generally ends at the end of the second year after the year the RMD was due.
To address a failure, the taxpayer must file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts. It is possible for the IRS to waive the penalty entirely if the taxpayer can demonstrate that the failure to take the RMD was due to a reasonable error and that they are taking steps to remedy the situation.