What is an IRA distribution?
A withdrawal from an IRA is referred to as a distribution. Distributions can come in the form of several payment patterns, from a one-time (lump-sum) payment to a series of distributions over a number of years. Depending on how old you are at the time of the distribution, the payment may be classified as a premature distribution (made prior to age 59½), a normal distribution (between ages 59½ and 73), or a required minimum distribution (after age 73). There are tax consequences to any type of traditional IRA distribution.
IRA distributions subject to income tax
When you receive a distribution from your traditional IRA, the amount you receive is generally subject to income tax. If you have made nondeductible contributions to your traditional IRA, part of any distribution will be considered nontaxable. Taxable income from an IRA is taxed at ordinary income tax rates even if the funds represent long-term capital gains or qualifying dividends from stock held within the IRA.
Premature distribution tax does not apply
Once you reach the age of 59½, you are allowed (but not required) to take distributions from your IRA without being subject to the 10% premature distribution tax. You may choose to take distributions sporadically, as you need the money, or you may request an automatic distribution from your account according to a prearranged schedule you establish with your IRA administrator.
Withholding from IRA distributions
Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. Generally, tax is withheld at a 10% rate. If you receive an annuity or similar periodic payment, tax withheld is based on your marital status and the number of withholding allowances you claim on your withholding certificate (Form W-4P). No withholding or waiver is needed when the distribution is a trustee-to-trustee rollover from one IRA to another. See the following section.
Other types of distributions
Lump-sum distributions
A lump-sum distribution is one whereby you receive the entire balance of your account in one payment. The trustee or custodian of your IRA will withhold 10% of your balance for taxes unless you choose not to have taxes withheld. You must report your distribution for income tax purposes and are subject to regular income taxes on the distribution.
Discretionary distributions
Discretionary distributions do not follow a payment schedule and are considered nonperiodic payments. Under this withdrawal scheme, you take distributions as the need arises. The IRA custodian or trustee will withhold 10% of your withdrawals for federal income tax unless you choose not to have tax withheld.
Should you withdraw money from your IRA between ages 59½ and 73?
It depends on your circumstances. If you really need the money for income or unforeseen expenses, it may very well be advisable to draw on your IRA. However, if you have other sources of income and
don’t need the IRA funds, you may want to think twice about withdrawing funds. Even though you will be free of the premature distribution tax once you’ve reached age 59½, you still may have to pay income taxes on all or part of any IRA withdrawals (depending on whether or not the contributions you made were tax deductible). If the amount of a taxable distribution is substantial, it may even push you into a higher tax bracket for that year. This could increase your annual tax liability significantly.
In addition, if you take a number of large IRA distributions after reaching 59½, your IRA could be depleted (or at least reduced in size) more quickly than you had planned. This could mean a smaller nest egg for your later retirement years when you may need income the most, and a much smaller balance available to leave to your beneficiaries when you die. And, of course, the longer you leave funds in an IRA, the greater the opportunity for compounded, tax-deferred growth of earnings. The point is that it’s often not wise or appropriate to take distributions from an IRA between ages 59½ and 73.
Content Prepared by Broadridge Investor Communication Solutions, Inc. Content has been updated to reflect figures for 2023. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Please consult your own legal or tax professional for more detailed information on tax issues and advice as they relate to your specific situation. Raymond James does not provide tax or legal advice.