What are the individual retirement account (IRA) distribution and tax rules?


Individual retirement account distribution and taxation rules vary according to the selected retirement plan. If you choose a traditional IRA, you are required to receive minimum distribution amounts that you start paying tax on when you reach a certain age. If you opt for a Roth IRA, you owe tax on your annual contributions but your distributions are exempt from income tax under certain circumstances.

Traditional IRA Distribution and Taxation Rules

  • Under a traditional IRA, contributions used to fund the retirement plan accumulate on a tax-deferred basis. The earnings are not taxed until they are distributed. Income taxation is deferred until retirement when an individual is likely to pay less money in taxes because of the lower income.
  • Taxes under traditional IRAs cannot be deferred indefinitely. This is why the federal government has issued strict regulations providing for the collection of the deferred taxes in due course. Here are the basic traditional IRA distribution rules that are in force:
  • Distributions from a traditional IRA must start when the IRA owner reaches age 70.5, but no later than 1 April of the year following the calendar year in which the age has been attained.
  • There is a required minimum distribution (RMD) amount that the IRA holder can choose to receive either in a lump sum, or in instalments. If IRA owners select the minimum amount distribution option, their RMDs must be distributed by December, 31 of each year.
  • If the distributions are less than the amount required by law or the RMD amounts have not been distributed by the IRA holder, a 50 percent tax may be imposed on the excess accumulations.

Roth IRA Tax Regulations

The traditional IRA minimum distribution rules after reaching age 70 ½ do not apply to Roth IRA. Because Roth IRA annual contributions are taxable, they can be made even after reaching retirement age. Roth IRA owners have the advantage of obtaining tax exemption of their distributions if they have held the retirement plan for at least five years, and have reached age 59 ½ or are disabled.

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