Saving for retirement is critical in planning your financial future, but what happens once you reach retirement age? Can the IRA you choose to contribute to now impact IRA withdrawals for accessing your savings once you retire? Yes, understanding IRA withdrawals is an essential aspect of managing your finances for retirement. 

Traditional IRAs come with strict withdrawal requirements in retirement, while Roth IRAs have no limits on withdrawals in retirement. Whether you are early on in building your savings or are already navigating retirement, knowing the differences in how withdrawals work on IRAs can help you create a better retirement plan. 

The Differences Between a Roth Vs. Traditional IRA

Separate rules and regulations guide eligibility, contributions, and withdrawals for Roth IRAs versus traditional IRAs. Here are some of the core differences. 

The guideline differences between these two types of retirement savings accounts come down to tax benefits. Do you need a tax break now? If so, a traditional IRA might be the better choice. But if you expect to be in a higher tax bracket in the future, taking advantage of a Roth IRA's tax-free growth and withdrawals is the smarter move. Your financial advisor can help you select the savings option that is best for your situation. 

Navigating Required Minimum Distributions and IRA Withdrawals

Moreover on the topic of IRA Withdrawals: You may spend years or decades contributing to your IRAs, but what do you do once you are ready to withdraw funds? How, when, and how much you can withdraw from your retirement savings will depend on your type of IRA. 

Traditional IRAs - RMDs and Tax Penalties

Unfortunately, if you have a traditional IRA, you won’t be able to stash away money forever. Once you hit the age of 73, the IRS will force you to take required minimum distributions (RMDs). 

How much you’ll need to take out of your IRA each year (link to calculating RMD article here) will depend on your age and your spouse’s age. You’ll need to carefully calculate the value to avoid a hefty IRS penalty of up to 25%.

While you can’t avoid RMDs, you do have a few options for limiting the tax burden (link to limiting RMD article here), such as donating to charity or utilizing a Roth conversion.

Roth IRAs - No Withdrawal Minimums

The money you have saved in a Roth IRA can stay there for as long as you want. Since contributions are made with post-tax dollars, the IRS does not impose RMDs on Roth IRAs. 

Not being required to withdraw money can let you hold onto more of your retirement savings for longer, helping to ensure you don’t run out of money in retirement or allowing you to pass on the untouched account to your heirs. Just be aware that inherited Roth IRAs will be subject to tax-free RMDs, and your Roth IRA account balance will be counted in your estate tax calculations. 

The Aligned Perspective: Roth vs Traditional IRA

When it comes to retirement, how and when you take withdrawals matters. You’ll need to balance minimizing your tax burden with making your savings last. But which type of IRA is best for that? 
The answer depends on your situation. Roth and traditional IRAs have fundamental differences in how they work and the tax advantages that guide them. Choosing the right account is crucial and best suited for a professional. By working with a financial advisor, you can not only maximize your tax benefits now and in the future but also ensure that the withdrawals and RMDs you take won’t jeopardize the longevity of your retirement.