A Roth IRA account is a necessary retirement savings account. Most people have access to them regardless of whether they are enrolled in another plan, such as a 401(k) plan at work. Roth IRA accounts provide tax benefits for the money you put into them as well.
Required Minimum Distribution Factors for Roth IRA Accounts
Roth accounts enjoy some of the same tax benefits as traditional IRA accounts, but they differ in some crucial ways. You put money into your Roth IRA after taxes. You cannot deduct the money from your taxable income or claim a tax credit for it, but the gains will grow tax-free. You have already paid taxes on the money before putting it into the account, so you do not pay tax on it when you withdraw it in retirement.
Therefore, the IRS has no reason to mandate a withdrawal. Roth IRA accounts do not require a required minimum distribution (RMD) during the account holder’s lifetime.
These exceptions from the RMD rules for Roth IRA accounts may not affect you if you intend to start withdrawing money from your Roth IRA before the RMD starting age. For those who may not need to withdraw money from a Roth IRA when they retire, a Roth IRA provides a great opportunity to let your earnings continue to grow tax-free. You may even be able to pass the money on to your heirs.
Required Minimum Distribution (RMD) for Traditional IRA Accounts
Owners of some retirement plans, including traditional 401(k) plans, traditional IRA accounts, SIMPLE IRA accounts, and SEP IRA accounts, had to start withdrawing money when they reached age 70.5. However, anyone who reached age 70.5 on or after January 1, 2020, has until age 72 to start withdrawing money from their accounts.
The required minimum distribution (RMDs) is the minimum amount you must withdraw from your account each year, and these amounts count as part of your taxable income. Tax-deductible accounts such as traditional IRAs allow you to deduct the money you contribute from your taxable income so you can defer paying taxes on that money until you retire, and RMDs give the IRS a chance to collect taxes on money that has been tax-free up to that point.
Any portion of the withdrawal that was taxed at the time of contribution should be treated as tax-exempt. For example, Roth funds converted into a 401(k) account will not count as taxable income because you initially contributed those funds after taxes.
You may not care about the RMD rule if you plan to rely on the income from your traditional IRA account in retirement. You may need to start using those funds before the RMD starting age if you retire in your 60s.
You may find that you need to withdraw more than the minimum required to meet your retirement needs. That’s fine because, as the name suggests, RMDs are just the minimum amount you must take. You can certainly take more.
However, this rule will lead to income tax for retirees who have other sources of income or who may not need to spend money in these types of accounts after the RMD starting age. Some of the money will not be in the IRA after you begin taking RMDs, so you will lose the chance for tax-deferred growth on that money in the future.
Some online RMD calculators, like the Schwab RMD Calculator, can also help you determine your RMDs for your IRA account.
Conclusion
All
Traditional IRAs and Roth IRA accounts offer tax benefits. Roth IRA accounts provide retirees with the flexibility to spend their account assets when they choose. Individuals must begin withdrawing funds from their traditional IRA accounts when they reach the age to start RMDs.
Tax-free growth in traditional IRAs stops when RMDs begin. You may want to place money in a Roth IRA alongside or instead of a traditional IRA if you expect to have other sources of income when you stop working. Roth IRA accounts have an advantage in this scenario as they allow you to continue growing your account assets tax-free or even pass your wealth on to your heirs.
FAQs
How do I calculate RMDs on my traditional IRA account?
The IRS calculates RMDs based on life expectancy projections. They issue tables that may be updated each year. Depending on your situation, age, beneficiaries, and other factors, you will need to refer to one of the three tables in Publication 590-B.
Are RMDs taxed?
Yes, distributions from retirement accounts are taxed as ordinary income if the money was not taxed when it was contributed.
Do I need to take RMDs on an inherited account?
You are subject to special rules if you are the beneficiary of a retirement account. You will need to take RMDs from both traditional IRA and Roth IRA accounts, regardless of whether the original account owner was required to do so. The distribution rules depend on the original account owner’s age at the time of transfer and your relationship to them.
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Sources:
Investor.gov. “Individual Retirement Accounts (IRAs).” IRS. “Retirement Topics – Required Minimum Distributions (RMDs).” IRS. “Publication 590-B (2021), Distributions From Individual Retirement Arrangements (IRAs).” IRS. “Required Minimum Distributions for IRA Beneficiaries.” IRS. “Retirement Plan and IRA Required Minimum Distributions FAQs.” IRS. “Publication 590-B (2021), Distributions From Individual Retirement Arrangements (IRAs).” IRS. “Publication 590-B (2021), Distributions From Individual Retirement Arrangements (IRAs).”
Source: https://www.thebalancemoney.com/roth-iras-and-required-minimum-distributions-rmds-rules-2894487
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