Retirement Plan Distributions: When to Take Them

The basic rule on required withdrawals

You generally must begin withdrawing funds, and paying tax on those withdrawals, no later than April 1 of the year after you reach the applicable required minimum distribution age. Under the SECURE 2.0 Act, that age is 73 for people born between 1951 and 1959, and 75 for those born in 1960 or later. The rule exists so retirement funds eventually get taxed, whether or not you actually need to spend them.

There's an exception if your employer's plan allows it: if you're still working when you reach the required age, you may be able to delay withdrawals until you actually retire. That exception doesn't apply if you own 5 percent or more of the business sponsoring the plan, and it doesn't apply to traditional IRAs at all, only to employer plans.

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Before you reach the required age

Until the year you reach the required age, you generally don't have to withdraw anything, though your employer's specific plan might require it anyway. Withdrawals before age 59 and a half from an IRA usually trigger a 10 percent early withdrawal penalty on top of ordinary income tax. Between 59 and a half and the required age, you owe only income tax on withdrawals, with no tax on the portion representing your own after-tax contributions.

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Once required withdrawals begin

Once you hit the required age, withdrawals must start. Technically the first one can be postponed until April 1 of the following year, but doing so means taking two years' worth of withdrawals in that single following year, which can bunch income into a higher bracket. Most tax advisors recommend simply withdrawing in the year you reach the required age instead.

The IRS uses a life-expectancy-based table to calculate your required amount each year: you divide your prior year-end retirement account balance by a factor tied to your age, and the result is your minimum withdrawal for the year. The distribution period assumes a joint life expectancy with a beneficiary roughly 10 years younger, which in practice stretches distributions out longer than a simple single-life calculation would. You can always withdraw more than the minimum and pay tax on the extra; what you can't do is withdraw less. Falling short triggers a penalty equal to 25 percent of the shortfall (previously 50 percent, reduced under SECURE 2.0), so this is one deadline worth taking seriously.

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Withdrawals after you die

How fast your heirs must withdraw funds, and pay income tax on them, depends heavily on who you named as beneficiary. Under the SECURE Act, an "eligible designated beneficiary," your surviving spouse, a minor child, a chronically ill or disabled person, or someone not more than 10 years younger than you, gets more favorable treatment than other heirs. Most other beneficiaries who inherit an account are now required to fully distribute it within 10 years of your death.

A surviving spouse has the most flexibility of any beneficiary: they can treat the IRA as their own, roll it into their own IRA (extending required withdrawals until they reach the required age themselves), or simply remain a beneficiary of your account, which avoids the early withdrawal penalty if they need funds before age 59 and a half. A minor child beneficiary becomes subject to the 10-year rule once they reach the age of majority. Beneficiaries who aren't individuals at all, an estate or most charities, generally must have the account fully distributed within 5 years of death if you hadn't yet begun required withdrawals, or over the remaining distribution period from the IRS table if you had.

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Tax planning for what your heirs receive

Unlike most inherited assets, which pass to heirs income-tax-free, retirement account balances are taxed to whoever receives them, roughly as they would have been taxed to you. A handful of planning techniques can soften that impact. Naming your spouse as beneficiary of retirement assets, while leaving non-retirement assets to other heirs, both reduces potential estate tax exposure and defers income tax as long as possible. If you're charitably inclined, leaving retirement assets to charity specifically can eliminate both estate and income tax on that portion while still achieving your charitable goal, since charities don't pay income tax on what they receive. A charitable remainder trust is a more sophisticated version of the same idea, letting family draw income from the assets for a period before the remainder passes to charity.

Because retirement accounts can carry a real estate tax exposure on top of the income tax due as funds are withdrawn, some people also use life insurance specifically to cover an anticipated estate tax bill, since insurance proceeds are generally exempt from income tax.

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