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 frist 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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Accesssing 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.