Traditional Individual Retirement Accounts (IRAs) remain a cornerstone of retirement planning. They offer upfront tax advantages but carry specific rules about withdrawals that every taxpayer should understand.

Tax Treatment of Traditional IRAs

When you contribute to a Traditional IRA, those contributions may be deductible depending on your income level and participation in an employer-sponsored retirement plan. This provides an immediate tax benefit by lowering your taxable income in the year of contribution.

However, the tax break is temporary. All withdrawals from a Traditional IRA—both the original contributions and the growth—are taxed as ordinary income when you take distributions in retirement. Unlike a Roth IRA, there is no tax-free withdrawal option for qualified distributions.

Required Minimum Distributions (RMDs)

The IRS requires that account holders begin taking Required Minimum Distributions (RMDs) once they reach a certain age. For most taxpayers today, RMDs begin at age 73 (pursuant to the SECURE 2.0 Act). The required withdrawal amount is based on life expectancy tables published by the IRS, and it recalculates each year.

The purpose of RMDs is straightforward: because Traditional IRAs were funded with pre-tax dollars, the government eventually requires you to take taxable withdrawals so that deferred tax revenue is collected.

Tax Implications of Missing an RMD

Failing to take an RMD carries one of the most severe penalties in the tax code. If you do not withdraw the required amount by December 31 of the applicable year, the IRS can impose an excise tax equal to 25% of the shortfall (recently reduced from 50%). For example, if your RMD was $10,000 and you only withdrew $5,000, the IRS could penalize you $1,250 on top of requiring you to withdraw the missing $5,000 and pay income tax on it.

If the mistake is corrected in a timely manner, the penalty may be reduced to 10%, but this is subject to IRS approval and proper filing of Form 5329.

Planning Considerations

• Tax Bracket Awareness: Because RMDs are fully taxable, they can push retirees into higher tax brackets if not carefully planned.
  
  
• Withdrawal Strategy: Some retirees begin withdrawals before RMD age to smooth out income and avoid large spikes later.
  
  
• Multiple IRAs: If you own multiple Traditional IRAs, you must calculate the RMD for each, but you may aggregate the total and withdraw from one or more accounts as you choose.
  
  

Conclusion

Traditional IRAs provide significant upfront tax advantages, but those benefits come with the obligation to eventually withdraw—and pay taxes on—the funds. Understanding RMD rules is essential to avoiding costly penalties and ensuring that retirement withdrawals align with your broader tax and financial planning strategy.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.