Retiring Smart: Know the IRA Withdrawal Rules

A Practical Guide to the Ins and Outs of IRA Withdrawal Rules

September 2012

When you start - and then begin to build - an individual retirement account (IRA), you're putting money away for the long term. But your intent isn't to salt the funds away forever. You're planning on the future. And because the future can come a lot quicker than any of us expect, it's smart to understand the IRA withdrawal rules for taking money out of your account.

Some basics: With a traditional IRA, you are allowed to start withdrawing funds - or in official terms, "take distributions" - after you reach the age of 59 1/2 .

And in fact, if you're retired, the federal government mandates that you start taking distributions by the time you reach 70 1/2 . At that point, the IRA withdrawal rules call for a minimum required distribution each year, which is calculated by looking at your IRA balance and your life expectancy.

Some more IRA withdrawal rules (and some common sense): You can take out more than the required minimum (but you probably also want to make your money last).

"When making withdrawals, it is important to monitor the rate you are withdrawing from your IRAs," Robert Schmansky, founder of Clear Financial Advisers in West Bloomfield, Michigan, told Ally Bank. "Most studies show that a four- to-five-percent annual withdrawal rate is sustainable in retirement if you have a diversified portfolio. You may have to reduce this amount if you retire early, or do not have a diversified investment portfolio." As you take money out of a traditional IRA, IRA withdrawal rules say, you will pay income taxes on those distributions.

The IRA withdrawal rules are different for a Roth IRA. In essence, you paid taxes on the money you contributed over the years, and the earnings grow tax-free. As a result, you can take money out without paying tax when you retire, as long as you are at least 59 1/2 and your money has been in the Roth IRA for at least five years.

In addition, IRA withdrawal rules allow you to take out the money you have contributed to a Roth IRA (but not the earnings) at any time, even before retirement. That's because you have already paid taxes on those funds. But don't forget that taking that money out early will reduce the amount you have for retirement.

At times, people think about taking money out of traditional IRAs before retirement, but you should avoid that if you can. "Consider early withdrawals only if you need the money," said Clear Financial Advisers' Schmansky. "In general, there is a 10-percent early distribution penalty, though there are exceptions."

The exceptions allowed by IRA withdrawal rules include taking money out for certain college expenses, paying significant medical expenses (based on your income level), and making a first-time home purchase. As a rule, you should check with a financial advisor or accountant to see how IRA withdrawal rules would affect you in the event of such withdrawals.

Learn more about the IRA withdrawal rules and the Ally Bank IRA options available by visiting AllyBank.com or give our live customer care department a call anytime, 24/7 at 877-247-ALLY (2559).

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