A traditional IRA is a way to save for retirement that gives you tax benefits. In general, amounts in your traditional IRA (including income and gains) aren’t taxed until you receive a distribution (payout) from your IRA. Your withdrawals from a Roth IRA are tax-free as long as you are 59 ½ years or older and your account is at least five years old. Withdrawals from traditional IRAs are taxed as regular income based on your tax bracket for the year you make the payout.
You must calculate the RMD separately for each IRA you own, but you can withdraw the total amount from one or more IRAs. For example, if you name a trust fund as a beneficiary instead of a spouse, the surviving spouse can transfer the IRA to their name to take advantage of IRA ownership rules. Harsh penalties for early withdrawals are one of the drawbacks of contributing to an IRA, but they’re not the same for traditional IRAs and Roth IRAs. For example, a spouse who inherits an IRA and has many more years to go before reaching RMD age may consider transferring those assets to their own IRA.
Thankfully, the original owners of Roth IRAs are exempt from the RMD rules, but beneficiaries who inherit a Roth IRA are generally required to accept distributions, and those rules depend on several factors. Switching from a traditional IRA to a Roth IRA may make sense if you think you’ll be in a higher tax bracket when you start the payout, you can pay conversion tax from outside sources, and you have a relatively long time horizon for wealth growth. For example, if your will states that you want your IRA to go to your daughter but your sister is listed as a beneficiary in your IRA account, your daughter may not receive the money. The withdrawal rules for IRAs depend on the type of IRA, your age, and how long it’s been since you first contributed to an IRA.