How Do IRA Distributions Work?

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IRA Distribution Rules

  • Except under very limited circumstances, an IRA distribution is considered an "early" distribution if it is made before the owner of the IRA reaches the age of 59 1/2. Any distribution made after age 59 1/2 is considered a "normal" distribution. In the year following the year the account owner turns 70 1/2 (and every year thereafter), the account owner must take a minimum distribution each year.

All Distributions

  • A distribution from an IRA is nothing more than a withdrawal from an account. As such, it works very much the same as any other withdrawal. The institution that holds the account is called the custodian. The account owner informs the custodian that they want to receive a certain amount of money, and the custodian delivers the funds to the account owner in the manner specified.

Early Distributions

  • An early distribution is subject to a 10% penalty plus ordinary income taxes on the amount withdrawn. No withholding is required, although some custodians will offer to do so as a service to their clients. So, an IRA owner who withdraws $10,000 as an early distribution could receive a check for $10,000 with no funds held back. However, when that person files their taxes for that year, they will owe $1,000 (10% of $10,000) plus $10,000 will be added to whatever their income was for the year and their taxes will be increased accordingly.

Normal Distributions

  • A normal distribution is subject to ordinary income tax, but no penalty. Again, no withholding is required, though the custodian may offer to do so. A person taking a normal distribution of $10,000 would, when they file their taxes for that year, add $10,000 to their income for the purposes of filing their taxes.

Required Minimum Distributions

  • Required Minimum Distributions are known as RMDs. IRS regulations require that a person over 70 1/2 must take a certain minimum distribution from their account every year based on a table published by the IRS. The amount required is calculated by taking the percentage from the table and using it with the end of year balance from the previous year.

    An IRA account holder must take RMDs once they turn 70 1/2, although the first distribution can technically be delayed to the following year, because the first distribution must be taken in the year AFTER the year in which the owner turns 70 1/2. So someone who turns 70 1/2 in 2008 could wait until 2009 to take their RMD for 2008. However, this does not delay the 2009 RMD so the person would need to take both the 2008 and 2009 RMDs in 2009.

    A RMD is taxable in the same way a normal distribution.

Reporting

  • Withdrawals are reported to the IRS by the custodian whether they are early, normal, or RMDs.

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