Rules for Cashing Out Your IRA After Age 70

Cashing out an IRA after age 70 involves specific rules that depend on the type of IRA and the account holder’s age. Traditional IRA owners must begin taking required minimum distributions (RMDs) starting at age 73, while Roth IRAs don’t require RMDs during the original owner’s lifetime. The IRS taxes withdrawals as ordinary income unless the account includes non-deductible contributions.

A financial advisor can help create a tailored IRA withdrawal strategy optimized for your situation. Find an advisor who serves your area.

IRA Withdrawal Rule Changes

The rules for cashing out your IRA have gone through significant modifications in recent years. In general, recent changes have loosened rather than tightened withdrawal rules.

In particular, the SECURE Act 2.0 raised the RMD age from 72 to 73 for those who turn 72 in 2023. It had previously been raised from 70 ½ to 72. Starting in 2033, the RMD age will rise to 75. As a result, RMDs will start at age 75 for anyone born in 1960 or later.

Furthermore, the penalty for failing to take an RMD or withdrawing too little has been reduced from 50% to 25% of the shortfall. The IRS also provides a pathway to lower the penalty to 10%.

How to Calculate Your RMD

Once you hit RMD age, you must start taking annual withdrawals from your traditional, SEP and SIMPLE IRAs by December 31 every year. The amount you must withdraw is based on your age, account balance and life expectancy factors set by the IRS in their Uniform Lifetime Table.

To calculate your RMD, you divide your prior year-end IRA balance by your life expectancy factor from the table. For example, the life expectancy factor at age 73 is 26.5. To calculate your RMD, divide the balance in your IRA at the end of the previous year by 26.5. You’re then required to withdraw at least that amount by the end of the current year.

Table III (Uniform Life Table) for RMD Calculations

The IRS allows you to delay your first RMD until April 1 of the year after you reach RMD age. However, if you choose to delay your initial RMD, you’ll be required to take two RMDs the following year. For example, if you turn 73 in 2025, you can push your first RMD until no later than April 1, 2026. However, you’ll also need to take your 2026 RMD by Dec. 31 of that year.

RMD Exceptions and Taxes

Rules vary depending on the type of retirement account and specific circumstances. For instance, Roth IRAs are exempt from RMD rules, so you can leave your account untouched if you wish no matter what your age.

There are also different rules for inherited IRAs, including both traditional and Roth types. Beneficiaries who inherit IRAs have varying RMD requirements based on their relationship to the original account holder.

Taxation of IRA withdrawals after retirement is more straightforward. The IRS taxes all pre-tax money withdrawn from traditional IRAs as ordinary income based on your federal income tax rate. Roth IRA withdrawals represent exceptions. You can take tax-free Roth withdrawals after age 59 ½.

Reasons to Follow IRA Withdrawal Rules

There are some solid motives for making sure you withdraw money from your IRA in accordance with the rules. In particular, skipping or skimping on RMDs can be an expensive mistake. That’s because if you fail to withdraw the full RMD amount you calculated, the IRS levies a 25% tax on whatever portion you missed. However, if the RMD is corrected within two years, the penalty drops to 10%.

Beyond financial penalties, not following the RMD rules could leave you cash-strapped. Sticking to RMDs ensures you have income to cover expenses now while preserving assets for future needs.

IRA Withdrawals in Action

To get an idea of how this works in practice, consider a retiree who turns 73 this year and has a $132,500 IRA balance. Their life expectancy factor per the IRS Uniform Lifetime Table is 26.5 years. Dividing their $132,500 balance by the 26.5-year distribution period gives them an RMD of $5,000 for the year.

This retiree only withdraws $3,000 that year, however, exposing themselves to a 25% penalty on the shortfall. In this case, the penalty would be 25% of $2,000 or $500. Instead, the retiree corrects the shortfall and pays just a $200 penalty.

Making a Plan

To avoid costly penalties, make sure you understand the RMD rules. Carefully consult the IRS Uniform Lifetime Table annually to calculate what you must withdraw and make a plan.

You might also consider taking more than the minimum in low-earning years. For larger accounts, spreading withdrawals over the year prevents big swings in income. Strategically converting traditional IRA balances into Roth accounts during lower-income years can also help you reduce or eliminate future RMDs.

Bottom Line

The money in your IRA is yours to spend as you like, but you’re not allowed to leave it in a tax-advantaged shelter forever. With traditional IRAs as well as some other retirement account types, you must start taking required minimum distributions at age 73. To ensure compliance, the IRS charges steep financial penalties if you don’t withdraw the minimums. Following IRS rules prevents losing money, while smart planning can help minimize taxes and maximize your retirement income.

Retirement Planning Tips

• Speaking with a financial advisor can ensure you take RMDs properly to avoid expensive IRS penalties. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.  
• Use SmartAsset’s online retirement calculator to see how much you need to retire.

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