IRS Publication 590-B

The IRS (Internal Revenue Service) Publication 590-B is a comprehensive guide published by the Internal Revenue Service that explains the rules and regulations governing distributions from Individual Retirement Arrangements (IRAs). This publication is particularly vital for taxpayers who own IRAs or are planning to take distributions from these accounts. The document covers various topics, including types of IRAs, required minimum distributions (RMDs), tax treatment of distributions, and penalties for early withdrawals.

Types of IRAs

Traditional IRA

A Traditional IRA is a tax-deferred retirement account where contributions may be tax-deductible. Income earned in the account is not taxed until it is withdrawn.

Roth IRA

A Roth IRA is a retirement account where contributions are made with after-tax dollars, but qualified distributions, including earnings, are tax-free.

SIMPLE IRA

SIMPLE (Savings Incentive Match Plan for Employees) IRAs are for small businesses and self-employed individuals, allowing employers and employees to contribute to traditional IRAs.

SEP IRA

SEP (Simplified Employee Pension) IRAs are established by employers, including self-employed individuals, letting them make retirement contributions to Traditional IRAs set up for their employees.

Required Minimum Distributions (RMDs)

One of the critical topics covered in Publication 590-B is the calculation and understanding of RMDs.

RMD Rules

  1. Age Requirement: Owners of Traditional IRAs must start taking RMDs at age 72.
  2. Calculation: The RMD amount is calculated based on the IRA account balance and the life expectancy factor taken from IRS tables.
  3. First RMD Deadline: The first RMD must be taken by April 1 of the year following the calendar year in which the account holder turns 72.
  4. Subsequent RMDs: Must be taken by December 31 of each year.

Penalties for Missing RMDs

Failure to take the RMD results in a 50% excise tax on the amount not withdrawn as required.

Tax Treatment of Distributions

Traditional IRA Distributions

Distributions from a Traditional IRA are generally taxed as ordinary income.

Roth IRA Distributions

Qualified distributions from a Roth IRA are tax-free, provided certain conditions are met (e.g., the account has been held for at least five years, and the distribution is made after age 59½).

Non-Qualified Distributions

Non-qualified distributions from a Roth IRA may be subject to income tax and a 10% early withdrawal penalty.

Distributions After Death

Publication 590-B also covers the handling of IRA accounts after the death of the account holder.

Designated Beneficiary

Designated beneficiaries have different rules based on whether they are a spouse, non-spouse individual, or non-person entity (e.g., estate, charity).

Inherited IRAs

  1. Spousal Beneficiaries: A spouse can treat an inherited IRA as their own or take distributions as a beneficiary.
  2. Non-Spousal Beneficiaries: Generally must deplete the account within ten years if the account holder died after 2019, due to the SECURE Act.

Early Withdrawals

Penalties may apply for withdrawing from an IRA before age 59½.

Exceptions to Early Withdrawal Penalty

Includes, but is not limited to:

Rollovers and Transfers

Rollover IRA

A distribution from an IRA can be rolled over to another IRA or a qualified retirement plan within 60 days without tax penalties.

Trustee-to-Trustee Transfer

Direct transfer from one IRA trustee to another is not taxable, nor does it count toward the 60-day rollover rule.

Resources and Tools

Publication 590-B also provides additional resources and tools, such as:

For more detailed and updated information, taxpayers and financial professionals can refer to IRS Publication 590-B.