For some reason I get this question a lot in my day job, so I thought I’d provide a little clarification on some of the rules regarding withdrawals from Individual Retirement Arrangements, or IRAs.
IRAs were designed to provide an opportunity for folks to save for retirement on a pre-tax, tax-deferred basis. In other words, the money grows without having to pay any taxes on the gains.
Of course, with an IRA you have to pay the piper at some point in time. That means when you get into retirement and start pulling money out, you’ll have to pay taxes. This can create a “tax-time bomb” in retirement, but I won’t get into that here.
The short answer to when you can withdraw funds from your IRA is – any time!
People are often shocked by that answer, but it’s true. You can withdraw your money from an IRA any time you’d like, but you just better be aware of the tax and penalty ramifications.
If you take money out after age 59 1/2 you won’t have to worry about any penalties, just the taxes. There are some exeptions to taking money out before age 59 1/2, so let’s take a look:
Withdrawing from Your IRA Before Age 59 1/2
The general rule is that if you withdraw money from your IRA before 59 1/2 the IRS whacks you with a 10% penalty. So, ideally you need to wait until you reach that age.
As with most IRS rules, there are some exceptions:
IRS publication 590 lists these exceptions to the 10% penalty:
- You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
- The distributions are not more than the cost of your medical insurance.
- You are disabled.
- You are the beneficiary of a deceased IRA owner.
- You are receiving distributions in the form of an annuity.
- The distributions are not more than your qualified higher education expenses.
- You use the distributions to buy, build, or rebuild a first home.
- The distribution is due to an IRS levy of the qualified plan.
- The distribution is a qualified reservist distribution.
These exceptions have some qualifiers on them so it’s important to look at the IRS publication to make sure you fit into one of these categories before you take the money out.
For example, the exception that says you can take the money in the form of annuity – basically what the IRS means here is that you must take “substantially equal period payments” – in other words a set amount per year for either (a) five years or (b) til 59 1/2, whichever is longer.
Also, be aware that these exceptions are for the 10% premature distribution penalty NOT taxes! You still have to pay taxes on any withdrawal you take out.
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Accessing Your IRA at 59 1/2
Reaching the magic age of 59 1/2 is one retirement milestone you should look forward to.
Once you reach this age, you can begin to take your IRA distributions penalty free! At this point you can take out as much as you want, whenever you want.
Again, there is no escaping the taxes (unless of course you are in a Roth IRA) so just be aware that every dollar you pull out will be as if you earned that money for the year – it counts as ordinary income.
By the way, you literally must reach age 59 1/2 – not 59, 5 months and 15 days. You can take the money any time on the day you turn 59 1/2 or after.
Just because you turned 59 1/2 doesn’t mean you have to take the money out though. You may not want to. If you’ve done a good job establishing other sources of income, you may decide to wait.
When must you start withdrawing from your IRA?
If you do decide to wait however, you won’t be able to leave that money in your IRA forever.
At age 70 1/2 you will be required to take a minimum distribution (also known as RMD, which uses a formula set up by the IRS to determine the amount) and pay taxes on those withdrawals.
But, what if you don’t need the money and you’d rather wait? That’s fine, but just know that good ol’ Uncle Sam will uppercut you with a 50% penalty on the amount that should’ve been distributed along with the normal taxes due.
They want to make sure they get their tax revenue some how. So be aware that sooner or later you have to take money out of your IRA.
Remember, you can always withdraw money from your IRA, but you need to know the right rules and regulations to determine when a distribution will be right for you.
Were you aware you could take money out of your IRA before retirement age? Are you planning on doing that? Leave a comment and tell us your situation!
This article was originally published at ChristianPF on February 15th, 2010.
{ 40 comments… read them below or add one }
The only thing I would remind people is that their 401(k)/457/403(b) can be tapped through loans, which MAY be a better option than taking out and paying taxes (regardless of whether we met one of the above exceptions).
Good point Evan. One word of caution on that would be that if you lose your job and have a 401k loan, it is considered to be a distribution and taxes (and penalties if under 59 1/2) are due.
Just something to keep in mind especially in this volatile job market we are in.
Nice, comprehensive post.
I’d just like to add some more detail to the point about taking the RMD at the age of 70 1/2. Although the owner must begin taking it, the first RMD payment can be delayed until April 1st of the following year. So if you turn 70 1/2 today, February 15, 2010, you can actually delay your first RMD until April 1, 2011.
Hope that helps a bit.
Great post about an oftentimes confusing topic. Great Job.
Darren, thanks for the additional detail there. That can come in handy if you expect income to be much lower the following year. Just remember that you have to take 2 out that following year (one for the previous year and one for the current year).
Yep, you’re right Jason. So following my example above, the retiree would have to take their RMD for 2011 in the same year, by December 31, 2011.
Ahh… the intricacies of retirement planning!
Jason,
Will this work as a way access funds from a Trad. IRA for someone under 59.5:
transfer 30K from trad. IRA to a Roth, and designate 20K of these funds to go toward the taxes. Therefore the 30K would be considered income; 10K of which would go into the Roth, and much of the 20K paid as taxes would be re-imbursed as an “over-payment of taxes” for that fiscal year.
Steve, It might work in the sense that you could do it – but I’m not sure why you’d want to. You don’t really want to pay taxes on a conversion with the IRA money – you want to have separate money to pay the taxes. You’d be killing a $30k IRA and making it $10k Roth and being taxed on the full $30k. Uncle Sam would absolutely love you!
This might seem like a stupid question but I’m 25 and I do have a Roth that I contribute myself and I have a simple IRA through my work which my employer contributes to as well, 3%. I contribute 3% too. Anyway, my question is…will that age 59 and 1/2 ever go up for IRA’s to withdraw without penalty? The retirement age is always going up..by the time I retire it’ll probably be 80 yrs old…better yet no social security even left…
Leah, it’s doubtful that the age would go up. The IRS wants tax revenue, so I don’t see why they would do that.
what is the tax rate for withdrawing from IRA. i am 66 and on SS.
also… i will be useing this for buying a second home.
Bill, the tax rate is whatever rate you are at with your income. Remember, any IRA money you pull out is considered ordinary income for tax purposes. You’ll need to consult your accountant, or walk through a 1040 yourself to figure out all of your income minus deductions etc.
I am 70yrs and 11 months, born June 30,1940. I am currently employed full time with a company that does not match my 401k deductions. I have a significant amount of money in my 401k; that I never withdrew from, my account my question is ” to avoid penalties from never withdrawing from this account what do I have to do ie: switch to a roth ira etc?. I eagerly wait for your response. Just founding about the stature of age limitatons for investors over 70 yrears of age. I do not want to be penalize for none withdrawal.
I am 25 and I currently have a traditional 401k, from a previous employer; a ROTH 401k, with my current emploter; and a Roth IRA. I am looking to do another IRA but having trouble deciding between a ROTH IRA and a traditional IRA. I was leaning towards the traditonal IRA because of the tax break for this year, but I dont know if that will hurt me in the long run. Guidance would be appreciated. Thanks.
I want to withdraw money from IRA, and I want to pay the taxes on it when I take it out. What is the percentage I would need to have Vanguard withhold for taxes?
Thanks
Jason,
I am 32, and looking to liquidate my IRA to start a business. I understand the tax implications, and have enough write-offs to offset these. Is there a way where I can withdraw my dollars and pay the taxes when they are due rather than up front? I am okay paying the penalty up front, but want to retain the other 10% that it is my understanding that the IRS takes right away as a tax payment. Please help…
My father was 80 at the end of 2011, he has an traditional ira. My question is, the ira is only in his name and he is presently in a nursing home. To protect my mother, the nursing home said we should use the ira money to pay for his nursing home care. Can we take out any amount of the ira to do this or will my parents be penalized for it? My mother was 81 at the end of 2011. Any help would be appreciated.
I’m 64 and retired. Would it be wise to start reducing my IRA now so I won’t be hit with such a large tax when it’s rmd time at 70 1/2? Are there calculators online, or books that address this? One option is to convert some to a Roth.
I have a 403b and work full time. My husband is looking at going back to school. I would need to work part time to cover our childcare situation. Could I roll my money from a 403b into an IRA and with draw a small amount of money and prepay taxes? I ask because if I pay off my car, the money saved on monthly payments (and money saved on our current babysitter) would equal the loss in pay from going part time . ie, if I need $3,000 to pay off my car, could I withdraw $3,500 and pay $500 toward the taxes? If so, how? or, could a car payment be considered part of the cost of education (like on a student loan) and have less penalties attached?
I read somewhere that beneficiary IRA’s according to the IRS. are not subject to tax! As the beneficiary of my late mother’s IRA account; last year I took a distribution of $10,000, used $5,000 to open up an account in my name. Can you tell me if the original $10,000 is taxable as a beneficiary IRA? I am 57 years old.
Thank you.
I have a traditional IRA and am 56 yo. My kids have college load debt, and I have significant credit card debt. I was wondering if I can take out an IRA loan to pay down either of these, without penalty? I figure the interest on the IRA loan would at least be going to me.
I turn 59 in October of this year. I am being told by my adviser that I can take money out of my IRA starting in January penalty free because the withdrawal will be taken in the year I turn 59 1/2. That seems different than what your saying. Now I’m scared about what to do. Please help.
Rod, I don’t know the answer but that is exactly the question I am trying to figure out. I turned 59 on January 17. I think that means that I can take penalty-free distributions on July 18.
But considering the big financial ramifications, I don’t want to pull the trigger until I am absolutely sure.
And the thing your adviser mentioned about being allowed to do distributions as of the first of the year in which you turn 59 1/2 I ran into also, on a financial advice web site.
But I don’t want to take any chances. All I can see in the IRS forms is did you take a distribution before age 59 1/2. I think that means I need to wait till July 18 and then I can proceed.
My husband died 4 months before the tornado in my city destroyed our home which i was in. The monnies from his job was given to me. I put the money 75,000. in a IRA and the very next month, I purchased a home, paid cash for it. My CPA says I owe 13,000. to the IRS. IS this correct? I have never bought a home befor and I am55 years old.Please HELP!!!
Is it possible to pay off student loans with an IRA and not have to pay taxes? I think I read that somewhere.
I WILL BE 72 IN DECEMBER. I AM AWARE OF THE WITHDRAWLS, MY QUESTION IS AT WHAT AGE DO I HAVE TO BE WHEN ALL THE IRA HAS TO BE DEPLETED?
I have a 401 (A)/414H..Whatever any of that means..ARGH! I have found myself needing to pay for the rest of my sons school tuition and tutoring for the remainder of the school year around $8000. My plan states that I cannot withdraw lump funds unless I retire/quit/or am fired. I have $64,799.10 currently. I am not looking to withdraw the entire amount obviously… Can I transfer some of this investment into another fund that I have access to? HELP!!!!
I am 45, and looking to liquidate my IRA to pay credit cards and help my mother financially to pay her medical expenses. I have $50K in my traditional IRA, could someone help me to calculate the net amount i am getting after all the penalties?
I’m 52, & last week rolled over a 401-K to a traditional IRA w/$130,000. I need to withdraw $10,000. On top of the 10% premature distribution penalty, how much will I be taxed? I live in NYC. I appreciate any input.
Wow? Change is coming alright! Uncle Obammy is feverishly working to ” Purchase ” every ones IRA in exchange for some Social Security option that pays squat and takes your hard earned savings. There is TRIILIONS of dollars in private retirement accounts and he wants them all. Just try saying no thanks when the offer no one can refuse comes. No way you say? Weel just tell Obammy no thanks for Obammy care and see what you get. No money not in your hands is safe, none.
I am aware that I can withdraw from my IRA even before I reach the retirement age… but I will not recommend it! Aside from the interest rate and taxes that we need to pay, we also have to consider its effect to our retirement.
I did know that you could take money before 59.5 years old, but I wasn’t aware of all of the reasons that allow you to do this. A major one I didn’t realize was for the purchase of your first home. This is a great option for a young couple who have some retirement savings, but not much in actual savings.
I would never recommend withdrawing from your retirement savings, whether it is 401K, 457, or 403b, before the retirement age. Though there are unavoidable situations why some people withdraw from their retirement fund, we should always bear in mind the main reason why IRA and the likes exist.
I have ALS (Lou Gehrig’s disease) and just turned 59. I will be going on retirement disability after May 3rd. The 401K adviser said that as long as I was 59 1/2 in the year, or also disabled at the end of the year, I wouldn’t be charged the 10%. Should I hold off until May 4th? I need the money to pay off credit cards and expenses until my social security picks up in 3 months.
In the article posted at the start, back in 2010, one of the exemptions to the 10% early distribution penalty needs to be updated for 2013.
The early distribution penalty for medical expenses that exceed 7 1/2% of your AGI must be updated to 10%, courtesy of the PPACA (AKA Obamcare). Beginning in 2013 for taxpayers under age 65 the medical deduction threshold has changed from the 7 1/2% to 10%. For taxpayers over age 65 the medical deduction remains at 7 1/2% until 2017 when it will increase to the 10% amount.
“I’m 52, & last week rolled over a 401-K to a traditional IRA w/$130,000. I need to withdraw $10,000. On top of the 10% premature distribution penalty, how much will I be taxed? I live in NYC. I appreciate any input.”
Isabel,
Any amount that is distributed from your Traditional IRA will be taxed as ordinary income, the same way your wages is taxed.
Because you are younger than 59 1/2 there will also be a penalty assessed unless one of the reasons for exempting the penalty applies.
A rollover occurs when you take possession of the money. In this situation the 401k administrator is required by law to withhold 20% for income tax purposes.
Another way to do the transfer and make it a non taxable event is to do a Trustee to Trustee Transfer. This is done by opening your IRA with the IRA custodian of your choice, and having this custodian handle the transfer.
Im 49 and I want to know what steps do I take to start taking money from my retirement fund thru AT&T.
Great discussion of the rules. One point to make is that the IRA money should be the last resource to invade. With the loss of pension plans and they way everyone moves around, we cannot rely on corporate/employer plans. The power of deferral and compounding are very important, so leaving this money alone is almost imperative to have anything for retirement years. And with the uncertainty in Congress, who knows what social security will provide at retirement.
I’m 67, am on Long Term Disability (through my employer) which will end later this year. I am considered an “unpaid employee” but know my position has been eliminated while I have been out on leave. When I separate from the company (which is inevitable) I am unsure of where to rollover my 401K. I have had a Traditional IRA and a Roth IRA for about 10 years but have not contributed to them, other than the original opening amounts which were not sizable. I know I need to do a rollover but which one would be better–to the traditional or to the Roth? I will definitely be needing to access all funds in order to survive, starting the end of this year. My income (L.T.D.) this year is not considered taxable income by the IRS. I have not yet filed for Social Security but will need to, as well, by year’s end. Thanks!