This article is going to cover the topic of IRA withdrawals. Here we're going to summarize the withdrawal or distribution rules that apply to a Traditional, Roth, and SIMPLE IRAs. We're going to talk about qualifying and minimum required distributions, exceptions to these rules, and possible income tax penalties.
In the following sections, we're going to use the words distribution and withdrawal interchangeably. For the most part, IRA holders believe they are making withdrawals from their account, while in the "technical" sense, the IRS considers these distributions.
All withdrawals from a Traditional IRA before age 59 1/2 are considered early withdrawals. If an accountholder takes an early withdrawal from their Traditional IRA, then in addition to any regular federal income or state income tax due, they also need to pay an additional 10% tax penalty.
Traditional IRAs also have a minimum required distribution rule. The MRD begins when the holder of a Traditional IRA reaches age 70 1/2. The intention of this withdrawal rule is to make sure that retirement money sitting in a Traditional IRA is methodically removed from that account (and taxes are paid) over the remaining expected lifespan of the accountholder.
The specific MRD rules include:
Remember, the intention here is to disburse the money over someone's expected remaining lifespan. So even if someone starts receiving distributions from their IRA before age 70 1/2, they still need to start calculating their required MRD by the beginning date mentioned earlier.
Even if an individual receives more than the required distribution in any year, they don't take a "credit" on their remaining account balance when calculating their MDR in future years.
Previously, we mentioned there were exceptions to the age 59 1/2 rule. In reality everyone that owns an IRA can take a withdrawal before the age 59 1/2 and avoid the 10% tax penalty. Everyone qualifies for penalty-free IRA withdrawals provided they take the money out in a certain fashion or for a certain reason. Let's take a closer look at how that can happen.
There are a total of eight exceptions to the age 59 1/2 rule that are outlined by the IRS:
This next rule is an interesting one. The federal government does not want to deny anyone access to their retirement money, as long as the money was truly going to be used for retirement. This is the basis for this final IRS withdrawal rule:
With any of these eight exceptions, it is best to seek the advice of a qualified tax professional. An IRA account is intended to provide income in retirement. If at all possible, it should be kept safe for that purpose.
In general, individuals can take a distribution from their Roth IRA once they've reached age 59 1/2 and after the 5-taxable-year period (which starts with the first year they made a contribution to a Roth IRA) has passed. Unlike a Traditional IRA, individuals are not required to take a minimum required distribution from a Roth.
If a withdrawal is not considered a qualified distribution, then the money may be taxed as ordinary income and subject to the additional 10% early withdrawal penalty. Even if a contribution had been included in taxable income in earlier years, a distribution before the 5-taxable-year period expires on a Roth conversion may be subject to this 10% penalty.
Just like the Traditional IRA, there are three exceptions to the early withdrawal rules that apply to a Roth.
In general, an employer cannot require an employee to keep any portion of their contributions in their SIMPLE IRA. Employers are also not allowed to introduce any plan-specific withdrawal rules.
SIMPLE IRAs follow the same withdrawal rules that apply to Traditional IRAs, including exceptions. But there is also a "2-year period" rule that is unique to SIMPLE IRAs.
The 2-year period begins on the date on which the employee first participated in any SIMPLE IRA plan maintained by their employer. If an employee takes an early distribution within this 2-year period, then the additional tax penalty is raised from 10% to 25%. However, if one of the exceptions mentioned earlier applies to these early withdrawals, then the 25% tax penalty is not imposed.
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