What happens to your IRA when you retire

When you retire, your IRA becomes a source of income rather than a savings account. You can withdraw money from it, and the rules about how much you must take and when depend on the type of IRA you have and your age. Traditional IRAs require you to start taking withdrawals at age 73 (as of 2023, under current law). Roth IRAs have no withdrawal requirement during your lifetime. In both cases, the money you withdraw is yours to spend however you need it.

The mechanics are straightforward: you contact your IRA custodian (the bank, brokerage, or investment firm holding your account) and request a withdrawal. They process it and send you the money, usually within a few business days. You can take withdrawals monthly, quarterly, annually, or whenever you need the cash. There is no penalty for withdrawing from your IRA after you turn 59½, which is the standard retirement age for IRA purposes.

Key Takeaways

  • Traditional IRAs require you to withdraw a minimum amount each year starting at age 73; Roth IRAs do not require withdrawals during your lifetime.
  • Withdrawals from a traditional IRA are taxed as ordinary income in the year you take them; Roth IRA withdrawals are tax-free if the account is at least five years old.
  • You can withdraw any amount you want after age 59½ without penalty, but taking less than the required minimum from a traditional IRA triggers a 25% penalty on the shortfall.
  • Your IRA custodian handles the withdrawal process, and you can set up automatic monthly payments or take withdrawals as needed.
  • If you need money before age 59½, you can withdraw from a Roth IRA penalty-free, but traditional IRA early withdrawals are taxed and penalized unless an exception applies.

Required minimum distributions from a traditional IRA

A required minimum distribution (RMD) is the smallest amount the IRS requires you to withdraw from a traditional IRA each year, starting at age 73. The IRS calculates this amount using a formula based on your account balance on December 31 of the prior year and your life expectancy. You can find the exact calculation in IRS Publication 590-B, or your custodian will calculate it for you.

If you do not take your RMD by December 31 each year, the IRS imposes a penalty of 25% on the amount you failed to withdraw (reduced to 10% if you correct the shortfall within two years). This is one of the steepest penalties in the tax code. For example, if your RMD is $10,000 and you withdraw nothing, you owe a $2,500 penalty. Your custodian will usually send you a notice in October or November reminding you of the amount due.

You can take your RMD all at once or spread it across the year in monthly or quarterly payments. If you have multiple traditional IRAs, you must calculate the RMD for each one, but you can withdraw the total from any single IRA—you do not have to withdraw from each account separately.

How taxes work on IRA withdrawals

Withdrawals from a traditional IRA are taxed as ordinary income in the year you take them. This means the money is added to your other income (Social Security, pensions, wages) and taxed at your marginal tax rate. If you contributed pre-tax dollars to your traditional IRA (which most people do), the entire withdrawal is taxable. If you made after-tax contributions, only the earnings portion is taxed; the contributions themselves come out tax-free.

Withdrawals from a Roth IRA are tax-free if two conditions are met: the account must be at least five years old, and you must be at least 59½ years old. If you withdraw before meeting both conditions, the earnings portion is taxed and penalized, though your contributions can always come out tax-free. This is one of the main reasons people choose Roth IRAs—the tax-free withdrawals in retirement.

You do not have to take withdrawals all at once. Many retirees take only what they need each year to keep their taxable income lower and avoid pushing themselves into a higher tax bracket. Your tax situation in retirement may be very different from your working years, so it is worth planning withdrawals with a tax professional if your IRA is large.

Withdrawals before age 59½

If you retire before age 59½ and need to withdraw from your IRA, the rules differ sharply between account types. From a Roth IRA, you can withdraw your contributions (the money you put in) at any time, tax-free and penalty-free. You can only withdraw earnings before 59½ if an exception applies, such as disability or a first-time home purchase (up to $10,000 lifetime).

From a traditional IRA, any withdrawal before 59½ is subject to a 10% early withdrawal penalty plus income tax on the full amount. However, several exceptions exist: disability, medical expenses exceeding 7.5% of your adjusted gross income, health insurance premiums while unemployed, and a few others. The most common exception for early retirees is the Rule of 55: if you leave your job in the year you turn 55 or later, you can withdraw from that employer's 401(k) or 403(b) without the 10% penalty (though income tax still applies). This rule does not apply to IRAs, only workplace plans.

Another option for early retirees is the Substantially Equal Periodic Payment (SEPP) rule, which allows penalty-free withdrawals from a traditional IRA before 59½ if you commit to taking equal payments for five years or until age 59½, whichever is longer. This requires careful calculation and is best done with professional guidance.

Setting up automatic withdrawals

Most custodians allow you to set up automatic monthly or quarterly withdrawals from your IRA. You can log into your account online, call the custodian, or visit in person to arrange this. The custodian will send the money to your bank account on a schedule you choose. Automatic withdrawals are convenient because you do not have to remember to request payment each time, and the money arrives predictably.

You can change the withdrawal amount or frequency at any time, and you can pause withdrawals if you do not need the money that month. If you have a large IRA and want to take only a portion each year, automatic withdrawals make it easy to stick to a plan. Keep records of all withdrawals for your tax return; your custodian will send you a Form 1099-R each January showing what you withdrew the prior year.

What happens if you inherit an IRA

If you inherit a traditional or Roth IRA from someone other than a spouse, the withdrawal rules are different from owning your own IRA. Under current law (the SECURE Act of 2019), most non-spouse beneficiaries must withdraw the entire inherited IRA within ten years of the original owner's death. The amount you withdraw each year is up to you, but the account must be empty by the end of year ten.

If you inherit an IRA from your spouse, you have more flexibility: you can treat it as your own IRA, roll it into your own IRA, or keep it as an inherited IRA. Treating it as your own means you follow the standard rules for your age and account type. If you are younger than 59½, this option lets you avoid the early withdrawal penalty.

Inherited IRAs are taxed the same way as your own: traditional IRA withdrawals are taxable income, and Roth IRA withdrawals are tax-free (if the five-year rule is met). The ten-year deadline is strict, and missing it results in a 25% penalty on the amount not withdrawn. Consult a tax professional if you inherit an IRA, because the rules are complex and mistakes are costly.

Converting a traditional IRA to a Roth in retirement

You can convert money from a traditional IRA to a Roth IRA at any age, even after you have started taking required minimum distributions. A conversion means you move money from the traditional IRA to a Roth IRA and pay income tax on the amount converted in that year. After the conversion, that money grows tax-free in the Roth and can be withdrawn tax-free in retirement.

Conversions make sense if you expect to be in a lower tax bracket in the year of conversion than in future years, or if you want to reduce the size of your traditional IRA to lower future required minimum distributions. For example, if you retire early and have a low income year before Social Security starts, converting a portion of your traditional IRA to a Roth at that low tax rate can save you money over time.

The downside is the immediate tax bill. If you convert $50,000, you owe income tax on $50,000 in that year, which could push you into a higher bracket or affect your Medicare premiums (which are based on income). Plan conversions carefully, ideally with a tax professional who can model the tax impact.

Frequently Asked Questions

Can I withdraw from my IRA without penalty before I turn 59½?

Yes, but only under specific circumstances. From a Roth IRA, you can withdraw your contributions anytime penalty-free. From a traditional IRA, you must meet an exception such as disability, medical hardship, or the Rule of 55 (if you left your job at 55 or older). Otherwise, you owe a 10% penalty plus income tax.

What is the penalty for missing a required minimum distribution?

The penalty is 25% of the amount you failed to withdraw. If your RMD is $10,000 and you withdraw nothing, you owe $2,500 to the IRS. This penalty is reduced to 10% if you correct the shortfall within two years. Your custodian will remind you of your RMD each fall.

Do I have to take money from my IRA every year in retirement?

Only if you have a traditional IRA and are age 73 or older. Roth IRAs have no required withdrawals during your lifetime. From a traditional IRA, you must take at least the RMD amount each year or face the penalty, but you can withdraw more if you need it.

Is there a limit to how much I can withdraw from my IRA each year?

No. You can withdraw as much as you want from your IRA at any time after age 59½ without penalty. The only limit is the RMD minimum from a traditional IRA—you must withdraw at least that amount, but there is no maximum.

What happens to my IRA if I die before I withdraw all the money?

Your beneficiaries inherit the IRA. Non-spouse beneficiaries must withdraw the entire account within ten years. Spouses can treat the IRA as their own or keep it as an inherited IRA. The tax treatment depends on whether it is a traditional or Roth IRA and who the beneficiary is.