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How Long can I Keep Money in a Traditional IRA?

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senior_couple_hikeQuestion:

At what age are you required to take out the remaining money in an IRA?

Answer:

Technically the answer is never, though traditional IRAs are designed to be drawn down substantially over your remaining lifetime. Roth IRAs, on the other hand, have no required schedule for taking money out of the plan.

Required minimum distribution schedule

Traditional IRAs are subject to required minimum distributions (RMDs) which dictate which portion of your remaining IRA balance must be withdrawn each year. RMDs start in the year you turn age 70 1/2.

The portion of your IRA you are expected to withdraw is determined by your expected remaining lifespan, which naturally gets shorter over time. However, in order to make sure you are able to preserve some IRA assets even if you live an extraordinarily long life, the IRS never requires you to withdraw all of the remaining assets in your IRA.

There is a different schedule for RMDs if you have a spouse who is 10 or more years younger than you and is the sole beneficiary of the IRA. In this case, the schedule is based on a blend of your age and your spouse's age, which slows down the pace of RMDs. This allows you to preserve more of the IRA for your spouse's future benefit, on the assumption that a significantly younger spouse is likely to outlive you.

Impact on your IRA balance

Some specific examples from the IRS RMD schedule can help illustrate how this works. These illustrations are based on an IRA owner who does not have a spouse who is ten or more years younger.

In the year you turn 70 1/2, you still may have a fairly long remaining lifespan so the RMD schedule at that age is based on distributing your remaining IRA assets over a period of 27.4 years. Thus your RMD for that first year would be your remaining IRA balance divided by 27.4.

This would result in an RMD of about 3.6 percent of your IRA's value. That wouldn't deplete your plan much, and with decent investment results you could easily make that back over the next year. However, as you grow older and your assumed remaining lifespan shortens, the pace of RMDs picks up.

When you are 80, the RMD schedule is based on distributing your remaining IRA assets over a period of 18.7 years. This means your RMD that year would represent about 5.3 percent of your IRA balance. Should you live to be 90, the RMD schedule is based on distributing your remaining IRA assets over a period of 11.4 years, which means your annual RMD at that point would represent about 8.8 percent of your IRA balance.

The schedule continues in this manner: as you get older the distribution period gets shorter, making each distribution a larger portion of your remaining assets. However, the shortest the distribution period ever gets (applicable at age 115 and beyond) is 1.9 years. This means you are never required to withdraw more than about 52.6 percent of your remaining balance.

Implications for retirement planning

You've worked all your life to save enough for retirement and now need to work at carefully managing withdrawals. Because of the changing pace of RMDs and the fact that they are likely to draw your IRA balance down over time, your RMD amounts may not coincide with your financial needs for in any given year.

For this reason it is wise to preserve some of the money from RMDs outside of the IRA, in case your future spending needs exceed your RMD amounts in later years.

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