Tax Consequences of IRA Distributions After Retirement

by W D Adkins

Retirement means freedom from many of the demands of life. Unfortunately, taxes are not always on the list of things you can forget about. The tax consequences of IRA distribution after retirement are different for traditional and Roth IRAs. Savings Incentive Match Plan (SIMPLE) and Simplified Employee Pension (SEP) IRAs usually follow traditional IRA rules.

Traditional IRA Distribution

Traditional IRA contributions are tax deductible and investment earnings are not taxed while they are in the account. At age 59 1/2, you are able to start taking distributions out of your IRA, and that's when you have to pay taxes. Withdrawn money is taxed at ordinary income tax rates in the year a distribution is made. Many people deliberately spread withdrawals out over several years. That's because withdrawing the account assets in a lump sum may push you into a high tax bracket. Taking the money out gradually can keep the income tax rate you pay at a lower level.

Non-Deductible Contributions

In some situations, part of the money in a traditional IRA is not subject to taxes. For example, assume your allowed deduction was phased out in some years because your income exceeded the IRS cap, but you chose to contribute anyway. That's allowed for traditional IRAs, but you must keep a record of the total nondeductible contributions, which is known as the cost basis. Normally, the cost basis is withdrawn in its entirety during the first few years you take distributions from a traditional IRA.

Mandatory Distributions

When you turn 59 1/2, you may choose to start withdrawing money form a traditional IRA, or leave it in the account and continue making contributions. However, it is mandatory that you begin making a minimum distribution the when reach age 70 1/2. Your mandatory minimum distribution is calculated to empty the account within your life expectancy. If you don't take out the minimum amount, the IRS will hit you with a 50 percent excise tax levied on the undistributed funds on top of ordinary income taxes.

Roth IRAs

If you have a Roth IRA, there are no tax deductions for making contributions to the account, but the tax benefit comes later. You must meet two conditions before you can withdraw funds without penalty. The account must be at least five calendar years old., and you must reach age 59 1/2. Provided you satisfy both conditions, there are no tax consequences for Roth IRA distributions after retirement because the money is not subject to income taxes. There are also no mandatory minimum distributions -- you may leave the money in your Roth IRA as long as you wish.