September 26, 2016

The purpose of this article is to describe IRA withdrawals for a typical retiree. It is not meant to be a comprehensive review of the subject, or to offer tax advice. Space does not permit us to discuss every type of IRA, nor do we claim to have the expertise to address every situation. We recommend that you consult your tax professional when planning for your IRA withdrawals. However, some of our clients have asked us general questions about IRA withdrawals, and this article is a response to their inquiries.

What Are IRA Accounts? 

Many of our clients have retirement savings held in Individual Retirement Arrangements (IRAs). IRAs are tax-advantaged accounts that allow individuals to accumulate assets meant to be used in retirement. The two main types of IRAs are what the Internal Revenue Service (IRS) calls Traditional IRAs and Roth IRAs. Traditional IRAs include Contributory IRAs and IRA Rollover accounts.

Traditional IRAs are the oldest form of IRA account, created by legislation in 1974. In a Traditional IRA, you generally contribute cash on a pre-tax basis. In other words, you make additions from your wages and you are able to deduct the amount you contributed from your taxable income. The income and gains on the investments in your IRA are not taxed. There are limits to how much you can contribute, and the tax deduction is phased out for higher earners. IRA Rollover accounts are usually the result of transferring assets from another retirement account, such as a 401(k) or 403(b). IRA Rollover accounts may be a substantial part of a person’s retirement assets.

Roth IRAs were created by legislation in 1997. Roth IRAs differ from Traditional IRAs in a significant way. Contributions are made to a Roth on an after-tax basis. You don’t get a tax-deduction for the contributions to a Roth. As with a Traditional IRA, the income and gains in your Roth are not taxed. There are also contribution limits, and restrictions on ontributionsfor higher earners.

What Are The Required Minimum Distributions (RMDs)? 

The IRS warns, "You cannot keep funds in a Traditional IRA...indefinitely" (IRS Publication 509-B). You must start making withdrawals from your Traditional IRA when you reach a certain age. The minimum amount you must take each year is calculated based on the value of your IRA account divided by a life expectancy figure from an IRS table. This amount is called your Required Minimum Distribution (RMD). There are severe penalties for not taking your RMD. You may have to pay a 50% excise tax on any amount that should have been distributed, but was not.

The magic age is 70 ½. You must take your first RMD by April 1st of the year after you turn that age. The value of your IRA on December 31st is used to determine the RMD. For most people, the life expectancy figure is taken from the Uniform Lifetime table. However, if your spouse is more than 10 years younger than you, and is the sole beneficiary of your IRA, a different table is used. It is the Joint Life and Last Survivor Expectancy table, which results in a lower RMD. The intention is to help the assets in the IRA last for both the IRA owner’s lifetime and the lifetime of the younger spouse.

The below table shows two examples. The IRA owner is 70 ½ in both examples. In Example A, the IRA owner is single or the IRA owner’s spouse is not more than 10 years younger. In Example B, the IRA owner’s spouse is 50 years old. 


The good news is that if an RMD is required, your IRA custodian “must either report the amount of the RMD to you or offer to calculate it for you” (IRS Publication 590-B). Also, you may withdraw more than the RMD without penalty after age 70 ½ if you wish to. The RMD is the minimum amount you must take.

How Are RMDs Taxed? 

If all of the contributions to a Traditional IRA were made on a pre-tax basis, then the full amount of the RMD and any additional amount you withdraw are taxed as ordinary income. This is the case for most IRA owners. However, some IRA owners may have a combination of pre-tax and after-tax contributions. When that is the case, the RMD is taxed differently, and we recommend you consult with your tax professional to determine the tax treatment.

Will Your RMD Affect Your Medicare Premiums? 

Medicare Part B Premiums are based on your Modified Adjusted Gross Income (MAGI). This includes all of your taxable income, such as pension income, dividends, interest, realized capital gains and your RMD. For calculating the MAGI, any non-taxable income, such as tax-free municipal bond interest, is added to your taxable income. 

If your RMD is substantial, it may increase your MAGI enough that it results in higher Medicare premiums. The table below shows the current MAGI levels that impact 2016 monthly premiums, based on income (as reported on your tax return two years ago).


If you have a year when your RMD may have a material effect on your future Medicare premiums, we recommend that you talk with your tax professional about the issue.

You May Make a Charitable Contribution from Your IRA to Satisfy the RMD

One possible solution to avoid a high MAGI and high income related deduction phase-outs would be to make a charitable contribution from your Traditional IRA. Assuming you are older than 70 ½, you may contribute up to $100,000 to a qualified charity. The contribution must go directly from your IRA to the charity. The contribution is counted as part (or all) of your RMD and is not included in your taxable income. However, you will not receive a charitable deduction for the gift. If you are considering making a charitable contribution from your IRA, please discuss the pros and cons with your tax professional.

You May Take Withdrawals from Your IRA before Age 70 ½

You may take withdrawals from your Traditional IRA without penalty if you are 59 ½ years old or older. The withdrawals are generally taxed as ordinary income. If you are younger than 59½ and take withdrawals, you will usually have to pay a 10% penalty on the amount withdrawn, in addition to the income taxes due. 

There are a few exceptions that would allow you to take withdrawals without penalty even if you are not yet 59 ½. The general categories of exceptions are for first-time home buyers and to pay for qualified educational expenses, medical expenses and qualified reservist distributions. You may also take “substantially equal payments” over a period of years, based on certain criteria and not be subject to the 10% penalty. The rules for each exemption are quite specific. We urge you to consult your tax professional before making any IRA withdrawals if you are not yet 59 ½, in order to avoid the tax penalty.

How Are Withdrawals from Roth IRAs Different? 

There are no RMDs for Roth IRAs. You may leave your assets in a Roth IRA indefinitely. If you choose to take withdrawals from your Roth, they are not taxed. However, there are the same penalties (and possible exemptions) for taking withdrawals before age 59 ½. In addition, there are special rules for taking withdrawals from a Roth IRA that was created by converting a Traditional IRA. The assets have to be held in the Roth for at least five years, and if there was more than one conversion there will be more than one five-year holding period. Please consult your tax professional before taking any withdrawals from a Roth IRA. 

There Are Other Types of IRAs

In this article we did not address withdrawals from Inherited IRAs, SEP IRAs or Simple IRAs. Nor did we discuss withdrawals from a Traditional IRA held as an annuity. Each of these IRAs has its own withdrawal rules and penalties for non-compliance. Please consult your tax professional about withdrawals if you own one of these types of IRAs. 

The IRS Has IRA Resources 

For those of you with an inclination toward doing your own tax research (you know who you are!), the IRS has several comprehensive publications on the topic of IRAs, which can be downloaded from their website,

  • Publication 590-A “Contributions to Individual Retirement Arrangements (IRAs)”
  • Publication 590-B “Distributions from Individual Retirement Arrangements (IRAs)”
  • Publication 560 “Retirement Plans for Small Businesses (SEP, SIMPLE, and Qualified Plans)”

Download Article: Making Withdrawals from IRA Accounts

Stay Connected