How a Traditional IRA Works After Retirement

An individual retirement account (IRA) is a place to save to support retirement. Many new retirees continue to contribute to their IRAs with part-time work. According to Fidelity, the average balance of an IRA account as of Q2 2024 was $249,000. How does a traditional IRA work after retirement? What happens when it’s time to tap into those tax-deferred IRA earnings?

Key Takeaways

• At age 59½, an account owner can begin distributions from a traditional IRA penalty-free but is subject to income taxes.
• IRA distributions aren’t required until age 73 if you were born between 1951 and 1959 and 75 if you were born in 1960 or after.
• Required minimum distributions (RMDs) don’t have to be spent, but they do have to be distributed.

Traditional IRA Withdrawals

The owner of an IRA can withdraw money or take a distribution from the account at any time. If it happens before age 59½, though, the account owner will incur a 10% early withdrawal penalty in addition to income taxes. The taxes and penalty amount depend on the tax deductibility of the contributions. At age 59½, an account owner can begin distributions from the IRA penalty-free, but subject to income taxes.

The IRS will waive the early withdrawal penalty when distributions are used for specific purposes, such as unreimbursed medical expenses, health insurance, qualified higher education expenses, or purchasing a first home. An account owner can also “borrow” from the IRA if they replace the money within 60 days.

Important

IRA owners are not required to start taking distributions at 59½ or even once they retire. Owners can defer distributions for more than a decade after turning 60.

Reverse Rollover

“A little-known strategy to access IRA funds without penalty before age 59½ is the ‘reverse rollover,'” says James B. Twining, founder of Financial Plan Inc. in Bellingham, WA. “This technique will work for those who are age 55 or older and have a 401(k) that accepts rollovers and allows for early retirement withdrawals at age 55. With this technique, IRA funds are first rolled into the 401(k), then the 401(k) funds are withdrawn without penalty.”

Required Minimum Distributions (RMDs)

At retirement, a required minimum distribution (RMD) is the amount that must be withdrawn annually from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account by owners and qualified retirement plan participants. Failure to take the annual RMD means account holders may be subject to a penalty tax of 50% of the missed distribution.”

The first RMD must be taken by April 1 of the year after the account owner turns age 73 if they were born between 1951 and 1959. The age is 75 if born in 1960 or after. If the owner reaches 73 in August, the first RMD must be taken by the following April 1. Minimum distributions must be taken by Dec. 31 of each year. If the owner of the account delays the first RMD until April 1 of the year after they turn 73, they’re required to take a second RMD in that same year, which counts as the second year for RMDs. 

The IRA custodian, or financial institution, will commonly calculate the RMD and notify the account owner about upcoming distribution deadlines.

Withdrawal Strategies

Although RMDs have to be taken, they don’t have to be spent. Purchasing an annuity can turn assets into a stream of income payments for life. Distributions can also be reinvested in municipal bonds, stocks, mutual funds, or exchange-traded funds (ETFs).

Another alternative is to deposit RMDs into a Roth IRA. You’ll still have to pay income taxes on the distribution, but the funds will be allowed to grow tax-free thereafter, and you are not obligated to take them out at any time or in any amount. The assets can be left in place, and bequeathed to survivors. If you do withdraw them, they won’t be taxable, provided you hold the Roth account for five years.

You can convert the entire traditional IRA account to a Roth IRA. This is an especially good strategy if your tax bracket in retirement is actually going to be higher than it was in your working days; however, bear in mind you will owe income taxes on the entire account in the year you convert and will likely incur a hefty tax bill in the short run.

Can I Have a Roth IRA After Retirement?

Yes, you can contribute to a Roth IRA after retirement but only if you are earning taxable income. The same contribution and income limits apply as they did before you retired. You cannot “convert” RMDs into Roth IRAs or roll over RMDs into Roth IRAs. You still have to take the distribution and pay the required taxes. You may then deposit the RMD into a Roth IRA if you meet the earned income requirement.

How Much Can I Contribute to an IRA After Retirement?

The amount that you can contribute to an IRA after retirement is the same that you were allowed to contribute before retirement. In 2024, the amount you can contribute is $7,000 but you can contribute an extra $1,000 if you are 50 or older, or $8,000 total. These limits do not increase for 2025.

What Is the 5-Year Rule for IRAs?

The five-year rule for a Roth IRA stipulates that you must have an account for five years before you are allowed to withdraw from it.

The Bottom Line

Traditional IRAs have many complicated distribution and tax rules to keep in mind. It can be tricky to determine when and how much to withdraw and how to reinvest the distributions if they aren’t spent otherwise. Start planning well before the RMD age to avoid having to make sudden moves with an IRA, and to determine how to best allocate these funds for maximum income and minimum taxes.