Life Events

Taking money out of a retirement account has tax consequences, and mistakes can be costly. These answers explain the key rules.

How are distributions taxed?

Withdrawals from traditional IRAs and pre-tax workplace plans are generally taxed as ordinary income. Qualified withdrawals from Roth accounts are generally tax-free. If you made after-tax contributions to a traditional account, part of each withdrawal may come back tax-free, which requires careful tracking.

What is the early withdrawal penalty?

Distributions taken before the age set by the IRS are generally subject to an additional tax on top of regular income tax. There are exceptions, such as certain medical costs, disability, a first-home purchase from an IRA within limits, and certain education costs. The details are specific, so check before relying on one.

What are required minimum distributions?

Once you reach the age set by law, most retirement accounts other than Roth IRAs require you to withdraw a minimum amount each year, based on your account balance and an IRS life-expectancy table. The starting age has changed in recent years, so confirm the current rule. If you miss a distribution, you may owe a penalty on the amount you should have taken.

Can I roll over a distribution?

Yes. A rollover moves money from one retirement account to another without current tax. A direct rollover, in which the plan sends funds straight to the new account, is usually the safest. If a check is made out to you, the plan is typically required to withhold tax, and you generally have a limited period to deposit the full amount into a new account to avoid taxes.

What about a lump-sum distribution?

Taking the entire balance at once can push you into a higher tax bracket and may leave you short later in retirement. Compare it with a rollover or periodic payments. If your plan includes company stock, special tax treatment may be available, which is worth discussing before you act.

Can I choose how much tax is withheld?

For many payments you can elect the withholding amount. If too little is withheld, you may owe a balance and possibly underpayment penalties, so consider estimated payments.

What should beneficiaries know?

People who inherit retirement accounts face their own distribution timelines, which depend on their relationship to the owner and the year of death. Before taking money out, ask us about the rules that apply.

Planning a withdrawal? Talk to us first so we can help you choose the approach with the smallest tax cost.