At age 65, you are eligible for normal distributions from your Individual Retirement Account in most cases. Certain restrictions apply to Roth IRA accounts that might affect normal distribution eligibility. Normal distributions from a traditional IRA are added to annual income whereas normal distributions from Roth IRAs are tax-free. How much you should distribute from your IRA at this age is contingent on eligibility, and the amount you need compared to the amount you have in retirement savings.
At age 65, you are automatically qualified for normal distributions out of the traditional IRA; normal distributions start at age 59 1/2 in these structures. However, the Roth IRA has a secondary eligibility requirement referred to as the five-year rule. The five-year rule is on top of the same age threshold, however, if you haven't owned the Roth for at least five years, you are not yet eligible for normal distributions. So if you converted a traditional IRA at age 62, at age 65 you still have two more years before normal eligibility. This doesn't mean you can't take money out; it means distributions considered IRA earnings are added to annual income and penalized 10 percent.
At age 65, you are allowed to take out as much as you want from your IRA account or leave all the money in for continued tax-deferred growth. This gives you flexibility with your money. With such control over your assets, it is imperative to balance how much you need now and what your future needs will be. After all, taking everything out right now could lead to exhausting retirement assets with possibly another 30 to 40 years of living. Establishing your need first looks at your overall budget, all retirement income sources and how much is required to supplement whatever it is you are drawing the money out for. For example, the IRA might serve as your annual vacation fund or provide you an extra $200 per month for leisure activities such as golf or fishing.
Making Assets Last
Realistically, the amount you take out should be less than the average annual return earned in the IRA. For example, if IRA assets earn 5 percent, taking out the earnings will preserve the principal, but taking out just 4 percent each year will allow the IRA to continue to conservatively grow, helping offset inflation costs within your budget in the future. The difference in a $100,000 IRA is $1,000 annually. This money then continues to grow tax-deferred and compounds with earnings. Making adjustments to your living budget might be required to accommodate preserving assets.
An IRS Guide
Traditional IRA owners must start taking distributions the year they reach age 70 1/2. Roth IRA owners don't because the money put into the Roth are already after-tax dollars. The IRS uses mortality tables and marital status to establish a life expectancy factor that calculates how much is required come out, called a Requirement Minimum Distribution, paying the IRA out over your lifetime but anticipating still having assets for your life expectancy. At 65 you are not required to take an RMD, but can still use the IRS tables found at IRS.gov to determine what you could take out based on your life expectancy.
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