For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.
An IRA distribution describes a withdrawal of cash and/or assets from an IRA. Distributions can be taken at any time. The type of IRA will determine whether there are taxes and penalties associated with distributions. Below are the two methods of distribution:
Cash Distributions - When an IRA holder requests a cash amount to be distributed from the account and sent via check, ACH, or wire directly into their hands. This method of distribution can be used for the full distribution or partial distribution of the IRA cash balance.
'In-kind' Distributions - Used to distribute non-cash assets from an IRA without selling these assets. This method of distribution changes the ownership of the asset from the IRA’s name to the name of the IRA holder. This type of withdrawal may be used for illiquid assets like real estate and private placements. The custodian must report the asset’s Fair Market Value (FMV) to the IRS to determine the dollar value of the distribution.
For cash and in-kind distributions, IRS Form 1099-R reports the distribution to the IRS.
Once a traditional IRA holder reaches age 73, they must withdraw a certain amount from the retirement account each year. That amount is called a Required Minimum Distribution, or RMD.
A required minimum distribution (RMD) is the minimum amount that an IRA owner must withdraw yearly, starting with the year that he or she reaches age 73. This rule applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, and Individual 401(k) plans.
Failure to take any portion of the minimum amount will incur a 25% penalty on the portion failed to be distributed. For 401(k) holders, failing to take an RMD could be cause for plan disqualification.
Keep in mind, the amount that must be withdrawn changes each year. The amount is based on a formula using the age of the individual for the year and the prior year-end account balance. The RMD of each retirement plan must be calculated separately. However, if the account is an IRA, the RMD may be satisfied by a distribution from another IRA.
The typical deadline for taking RMDs is December 31 of each year. If it is the IRA holder’s first RMD, the distribution deadline can be extended until April 1 of the following year after they turn 73. However, if the IRA holder delays taking their first RMD, they must take two RMDs in the following year.
For example, if an IRA holder turns 73 in 2024, they do not have to take their first RMD until April 1, 2025. However, they will be required to take their second RMD by December 31, 2025.
Note: Taking more than the RMD will not reduce the amount of the following year’s RMD.
Important Tips:
The simplest way to calculate your RMD is to use the RMD Calculator from the U.S. Securities and Exchange Commission.
If you’d prefer to do it yourself, first determine the adjusted market value of your IRAs as of December 31 of the preceding year. Next, divide that figure by the life expectancy figure corresponding with your age under the Uniform Lifetime Table [Table III in IRS Publication 590, Individual Retirement Arrangements (IRAs)].
The relevant age is what you would attain on your birthday during the year. If your spouse is the sole beneficiary and is more than 10 years younger than you, you may use the Joint Life and Last Survivor Expectancy Table (Table II in IRS Publication 590). In general, using this table as opposed to the Uniform Lifetime Table will reduce the amount required.
For Individual 401(k) plans, the plan sponsor is responsible for calculating and distributing the RMD from the plan. Failure to distribute the RMD for plan participants will jeopardize the plan’s qualified status.
After the SECURE Act of 2019, many beneficiaries were confused whether life expectancy payments needed to continue during the 10-year period. In July 2023, the IRS published Notice 2023-54, clarifying the requirements. The notice confirms that non-eligible designated beneficiaries of IRA holders who died after their required beginning date in 2019 must take life expectancy payments and empty the account within the 10-year period.
If you missed an RMD in 2020, 2021, or 2022 due to this confusion, you won't be penalized. However, you will be penalized if you did not take the deceased IRA holder’s RMD in the year of their death.
IRA holders will be subject to a 25% penalty for any amount failed to be distributed.
Example: If your RMD is $5,000.00 and you only distributed $4,000.00, you will have a penalty of $250.00. This is 25% of the $1,000 you did not distribute.
Certain investments that are hard to liquidate may be an issue when it comes to taking an RMD. Although taking an in-kind distribution may be an option, it can be difficult and sometimes costly.
Option 1: Pay the 25% penalty. By paying the penalty using IRS Form 5329 and completing Section 9, the RMD does not have to be distributed for the year.
Option 2: Convert assets from their traditional, SEP, and SIMPLE IRAs to a Roth IRA.
Note: Roth IRAs can only be funded with post-tax savings, so this conversion will require you to pay income taxes on the amounts converted. Additionally, if there is an outstanding RMD, it must be satisfied before converting the assets.
Includes traditional, SEP, and SIMPLE IRAs.
The contributions you make to your IRA are intended to supplement your income during your retirement years. However, as much as you would like to let your IRAs remain untouched until retirement, unforeseen expenses may force you to distribute some of those assets prematurely. Should you decide to take an early distribution from your IRA, these amounts may be subject to federal and state taxes.
If you take a distribution, you may be assessed an additional 10% early distribution penalty on any taxable amount. The IRS imposes this penalty to deter individuals from taking premature distributions from their retirement accounts. The penalty may be waived for the following exceptions:
| Health Insurance |
If you are unemployed for a period of consecutive 12 weeks, you may take penalty-free distributions from your IRA to pay for your health insurance (COBRA).
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| Medical Expenses |
IRA distributions to pay for medical expenses that exceed 7.5% of their adjusted gross income.
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First-Time Home Purchase |
Distributions from an IRA of up to $10,000 to use towards a first-time home purchase. A home purchase qualifies as a first-time home purchase if you have not owned a home for the past two years. This $10,000 is a lifetime limit.
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| Death or Disability |
If a physician determines that, because of a mental or physical disability, you are unable to engage in any gainful employment, you are allowed to take penalty-free distributions from your IRA. If you die before reaching the age of 59½, your beneficiary may take penalty-free distributions from the IRA.
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| Higher Level Education Expenses |
Any distributions that go towards any higher level education expenses for you, your child, your grandchild, or your spouse's grandchild. There is no dollar limit for this exception. |
| Inherited IRA Assets |
If you are the beneficiary of a deceased IRA holder, amounts distributed from the inherited IRA are not subject to an early-distribution penalty. |
| Periodic Payments |
Arranging a stream of annual distributions under one of three IRS - pre-approved methods – must be taken until the IRA holder is either age 59½ or for five years, whichever comes later. This is referred to as taking substantially equal periodic payments (SEPPs) from your IRA. |
| IRS Levy |
The 10% penalty is waived for amounts withdrawn from your IRA as a result of an IRS levy. However, if you voluntarily withdraw the amount from your IRA to pay taxes owed without an IRS levy, the distribution will be subject to an IRA penalty. |
| Military |
Qualified reservist distributions are not subject to the 10% penalty. Distributions may be repaid back to a retirement plan within two years from distribution. |
| Qualified Birth or Adoption |
With the passage of the SECURE Act of 2019, you may now take penalty-free withdrawals from retirement plans for any “birth or adoption distributions” (QBADs). A couple can distribute up to $5,000 each (a total of $10,000) from their retirement plans for birth or adoption expenses. The child’s name and tax identification number must appear on the individual’s tax return within one year of the birth or finalized adoption. QBADs are not subject to the 10% early withdrawal penalty, though they are subject to income tax. However, even the income tax may be reimbursed if the amount withdrawn is eventually repaid to the retirement plan. Previously, there was no specific window for making this repayment. In 2022, the SECURE Act 2.0 reduced the unlimited repayment window to three years from the distribution date. |
Once you reach age 59½, you can withdraw funds from your traditional IRA without restrictions or penalties. But keep in mind that your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income.
Beginning in the year you turn 73, you must start taking an annual Required Minimum Distribution (RMD) from your traditional IRA. If you don’t make withdrawals, you’ll have to pay a 25% penalty on the amount you should have withdrawn.
Important update for 72 and 73 year-old IRA holders: In late 2022, the Secure Act 2.0 raised the RMD age from 72 to 73. However, many IRA holders who turned 72 in 2023 still took an RMD, believing that it was required. In July 2023, the IRS published Notice 2023-54, allowing these IRA holders who took an unnecessary RMD to roll the funds back into their IRA without penalty.
If you turned 72 in 2023 and took an RMD between January 1, 2023 and July 31, 2023 because you didn’t realize the RMD age had gone up, you have until September 30, 2023 to roll the funds back into your account. This rollover is permitted even if you completed a rollover within the last 12 months. However, it does prevent you from completing another rollover in the next 12 months.
For the most part, Roth IRA withdrawal rules are more flexible than those for a 401(k) or even a traditional IRA. Because you already paid taxes on the money you’ve contributed to a Roth IRA, you can withdraw your contributions at any time, without tax and penalty. The keyword here is contributions — the money you put into the account. Different rules apply to conversion amounts and investment earnings.
If you are under the age of 59 ½, amounts converted must satisfy a five-year period to avoid being subject to the 10% penalty.
To distribute investment earnings without owing income taxes and a 10% penalty, you’ll have to meet specific criteria. You must meet one of the following reasons: attaining age 59 ½, death, disability, or a first-time home buyer (maximum $10,000) as well as you must have satisfied the 5-year period.
The 5-year period means it's been five years since you contributed to your first Roth IRA. The clock for the five-year period begins as of January 1 of the year for which a contribution was made. As an example, if you made a contribution in July of 2023, the clock started as of January 1, 2023.
Generally, you’ll owe income taxes and a 10% penalty if you withdraw earnings from your account. You can avoid the penalty, but not the income taxes, if you meet one of the following exceptions:
You can avoid taxes and penalties on earnings you withdraw from your account if you meet one of the following exceptions:
You’ll owe income tax but no penalty on earnings that you withdraw.
You can withdraw earnings with no tax nor penalty.
The simplest way to calculate your RMD is to use the SEC’s RMD Calculator.
However, you can also calculate your RMD manually. Your RMD is generally determined by dividing the adjusted market value of your IRAs as of December 31 of the preceding year by a life expectancy number that corresponds with your age under the Uniform Lifetime Table [Table III in IRS Publication 590, Individual Retirement Arrangements (IRAs)]. The relevant age is the one you would attain as of your birthday during the year.
If your spouse is your sole beneficiary and is more than 10 years younger than you, you have the option to use the Joint Life and Last Survivor Expectancy Table (Table II in IRS Publication 590) which will reduce the amount required.
For individual 401(k) plans, the employer/plan sponsor is responsible for calculating and distributing the RMD from the plan. Failure to distribute the RMD for plan participants will jeopardize the plan’s qualified status which has tax consequences including plan disqualification.
Social Security income is typically not taxed as long as the combined taxable income of an individual or a married couple is below a certain level. IRS Publication 915 provides more information on how your Social Security benefit is taxed. If you have further questions, seek the guidance of a tax advisor.
Regardless of your age, you will need to declare the distribution on the IRS Form 1040 which is your personal tax return. Record the amount of the IRA withdrawal on line 4a or the line that states “IRA distributions”.
Since you took the withdrawal before you reached age 59½, you will need to pay an additional 10% tax on early distributions and report it on Form 1040 as an additional tax. That is, unless you met one of the exceptions listed in Publication 590-B.
You will need to complete and attach Form 5329 to report any amount subject to the early distribution penalty or to state an exception to a penalty. Certain distributions from Roth IRAs are not taxable.
