Quick Summary

  • You can take your money out of an IRA at any time, but you will also owe an additional penalty if you withdraw money before you are 59½.
  • You can avoid the penalty if you take the money out for certain hardships, such as medical expenses and home purchases.
  • As traditional IRAs are generally funded with pre-tax dollars, you will still need to pay taxes on the amount you withdraw.

Introduction

IRAs are accounts that help you save for retirement by giving you special tax breaks. You can use the money that you save in a traditional IRA or a Roth IRA at any time. However, you might have to pay taxes and penalties if you pull money out before you turn 59½. There is no need to show a hardship to take a distribution, but showing a hardship could enable you to avoid the taxes and penalty.

In this article you’ll find answers to the following:

  • How much in taxes and penalties will you pay with different kinds of IRAs?
  • How can you withdraw your IRA money without paying a penalty?
  • How do you withdraw the money?
  • Am I required to withdraw from my IRA?

How Much in Taxes and Penalties Will You Pay?

IRA Withdrawal Rules for Traditional IRAs

With a traditional IRA, if you take the money out before you are 59½, you will pay taxes on your distribution at your normal rate, and your distribution will be subject to a 10 percent additional penalty. If you take money out after 59½, you will pay taxes on the withdrawal but not the penalty.

Even if you are younger than 59½, you can avoid the penalty if you use the money for certain purposes:

  • To pay for higher education
  • To buy your first house, up to $10,000
  • To pay for health insurance while you are unemployed
  • To pay for medical expenses that are greater than 10 percent of your income if you are younger than 65 (7.5 percent if you are 65 or older)

Or in some special circumstances:

  • You are a military reservist called to active duty
  • Death of the IRA owner
  • Permanent disability of the IRA owner

You can see a full chart of the exceptions provided by the IRS.

If you get a distribution from your IRA, your bank or brokerage will send you a form. You may also have to file an additional IRS document, Form 5329, with your income tax return that declares the distribution and why you took it and explains how much you owe the government. Many people consult with accountants or financial advisors to make sure they are paying the right amount.

IRA Withdrawal Rules for Roth IRAs

The rules on Roth IRA withdrawals are a little different. With a Roth IRA you have already paid taxes on the original investment, so if you make an early withdrawal you only need to pay taxes on the earnings. That means if your withdrawal exceeds your contributions, you will pay taxes on the difference.

In addition, if you take the money out in the first five years after you open the account, you will pay a penalty of 10 percent. After you satisfy the time requirement you can take the money out and avoid paying taxes and the penalty if you are withdrawing the money for one of three reasons:

  • The money is used to buy, build or rebuild a first home, up to a $10,000 maximum, and is spent within 120 days of the withdrawal.
  • The money is withdrawn because you suffered a disability.
  • The money is distributed to your beneficiaries or to your estate after you die.

Read more about early withdrawals and Roth IRAs.

Other IRA Withdrawal Rules

If you take a withdrawal from a SIMPLE IRA in the first two years, you must pay a 25 percent penalty. A SIMPLE IRA is a plan often used by small employers or the self-employed. Check out the IRS’ website for more information.

How Do You Withdraw the Money?

Contact your bank or brokerage to ask for a check. When it is time to file your taxes, regardless of your age, you will need to show the amount of the IRA withdrawal on your tax return.

Are You Required to Withdraw Money?

While we’ve focused on the rules on withdrawals or distributions before 59½, after 70½ you are required to begin taking the money out. Traditional IRA owners must begin taking annual distributions—called required minimum distributions (RMDs)—from their IRA by the April 1 after they turn 70½. After that they must be taken every year, and the IRS determines the annual amount. See IRS Publication 590-B for more information. Owners who fail to take RMDs will owe a 50 percent excise-tax penalty on the required sum not distributed.

 

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