Perhaps the most complicated aspect of managing an IRA is not the contributions; it’s the tax declarations and regulations when you begin to take distributions. The IRS has a number of rules regarding IRA withdrawals and disbursements, and they apply to you as well as your beneficiaries. Today we’ll cover key information in Publication 590-B.
What is IRS publication 590-B?
IRS Publication 590-B is the complete set of rules and regulations related to taxing IRA disbursements. It is the companion to Publication 590-A, which governs IRA contributions.
An IRA “disbursement” is also known as a distribution or a withdrawal. It is the term for taking funds out of an IRA, using a wide range of methods. This should not be confused with a “transfer” that is usually used to move IRA funds from one account to another, or one type of retirement account to another, so is not considered a disbursement.
The IRS has done its best to make Pub 590-B useful and easy to understand, with clickable navigation, FAQs, and other features. However, as you might expect, many people still have a lot of questions about Pub 590-B and IRAs. The rules are complex, with a lot of qualifications and exceptions.
What does publication 590-B say about IRA disbursements?
Here is a brief overview of the most important sections of IRS Publication 590-B, and some of the most frequently asked questions about it:
When can you withdraw funds from an IRA?
You can withdraw funds from an IRA at any time. However, you may owe a 10% tax penalty if:
- You withdraw funds from a Traditional IRA before the age of 59 1/2
- You withdraw earnings (not contributions) from a Roth IRA before you reach the age of 59 1/2, or before you have had the account for 5 years. You can withdraw Roth IRA contributions at any time without a tax penalty.
There are exceptions to the tax penalty for medical and disability costs, higher education and home buying expenses, and other allowed disbursements.
When must you withdraw funds from an IRA?
People who have a Traditional IRA are required to take a certain amount of money from the account annually (called a “Required Minimum Distribution” or RMD) or pay a 50% tax penalty on that amount. If you have a traditional IRA, you are required to begin withdrawing from your IRA no later than April 1 of the year after you turn 72. The exact amount of the minimum withdrawal is calculated based on various factors, further explained in Pub 590-B. People who have Roth IRAs are not required to withdraw funds at any time.
What tax rules apply to people who have inherited an IRA?
Most applicable tax regulations are designed for people who have opened an IRA. However, a different set of rules apply to IRA beneficiaries. There are also different rules and options for different types of beneficiaries: surviving spouses are subject to different requirements than other family members, or a trust. There are also different rules that apply depending on whether you have inherited a Traditional or a Roth IRA.
Are IRA distributions taxable?
Generally speaking, distributions from a Traditional IRA are taxable as income. Distributions from a Roth IRA are not taxed. However, as you might expect, there are some complications and exceptions. In many cases, a person may have an IRA that is partly taxable: they made taxable contributions, but then rolled over non-taxable amounts into the same IRA. A person may also make tax-deductible contributions and taxable withdrawals in the same year. The relevant rules are in IRS Publication 590-B, but it is always advisable to discuss your exact situation with a tax professional.
Are there recent updates or changes to IRS Pub 590-B?
The most recent updates and changes to 590-B have been to make the IRS regulations comply with certain new laws. The most relevant are:
- The CARES Act. Passed in March 2020, the CARES Act was a special Coronavirus relief bill. The bill granted certain temporary exceptions to some of the rules regarding IRA withdrawals for the year 2020.
- The SECURE Act. Passed in December 2019, the SECURE Act was related to pensions and retirement and had several important provisions that affected IRA accounts. The SECURE Act raised the minimum age for required distributions, extended the time in which workers can contribute to an IRA, and changed the rules for non-spouse IRA beneficiaries. Most significantly, the SECURE Act eliminated the so-called “stretch IRA”, where an inherited IRA could be disbursed over many years. Now, most inherited IRAs must be disbursed and all taxes paid within 10 years. The 2020 version of Publication 590-B referred to annual withdrawals from inherited IRAs, which was inconsistent with the language in the SECURE Act. In May of 2021, Pub 590-B was amended to use language consistent with the provisions of the SECURE Act.
More IRA Distribution Resources
For most people, determining how and when to best manage their tax obligations when withdrawing from an IRA can be a challenge. The IRS has provided helpful worksheets and resources to help you understand your distribution requirements and options, but it is always best to consult with a tax professional to determine what is best for you.
Contact IRAR for a free consultation to learn new ways to manage and grow your IRA, now and into the future.