IRA withdrawal rules

When you contribute money to an individual retirement account (IRA), you're putting money away for the future, but if you're looking for alternatives to investing  beyond a 401(k) , you might consider a Roth or traditional IRA.

You'll be tapping into your nest egg before you know it, so it’s smart to understand both the traditional and Roth IRA withdrawal rules when the time comes. Knowing the withdrawal rules can help you avoid penalties on the money that's in your nest egg. 

Traditional IRAs allow individuals to contribute earnings into a retirement account toward investments that can grow tax-deferred until they are withdrawn. 

In the case of both a traditional and Roth IRA, you can start withdrawing funds (or in official terms, "take distributions") after you reach age 59½. At age 73 and over, you must begin taking annual required minimum distributions (RMDs) from your traditional IRA, which must be withdrawn by April 1 of the year after you reach age 73. After that, you must take an RMD by December 31. 

The amount of your RMD is calculated by dividing the value of your traditional IRA by a life expectancy factor, as determined by the IRS. You can always withdraw more than the RMD but remember that all distributions are taxed as income. If you don’t make withdrawals, you’ll have to pay a 50% penalty on the amount you should’ve withdrawn. 

In general, in addition to being subject to income tax, you'll pay a 10% early withdrawal penalty if money is taken from your IRA prior to age 59½.

There are exceptions to the 10% penalty. In some cases, you're exempt from having to pay the penalty, as we've outlined below.

In some cases, you can use money from a traditional IRA for a home purchase. If it's your first time purchasing a home, you must use the money within 120 days and you have a pre-tax lifetime limit of $10,000.

If you or your immediate family members want to pay for qualified educational expenses such as tuition, fees, books, supplies and required equipment without penalty, you can withdraw funds from your traditional IRA.

Suffering from a total and permanent disability allows you to withdraw IRA funds without penalty. Your beneficiaries will not be subject to withdrawal penalties if you pass away. 

If you have medical expenses that amount to more than 10% of your adjusted gross income (AGI), you can use IRA funds to pay for it and avoid an early withdrawal penalty.

You can withdraw $5,000 to pay for a birth or adoption expenses without penalty.

You may be able to withdraw money from your traditional IRA without having to pay a penalty if you are unemployed for at least 12 weeks if you need money to pay for health insurance for you, your spouse and your dependents.

If you experience a tax levy, you can claim a tax penalty exemption.

You may be able to take penalty-free distributions if you are a member of the National Guard or a reservist if you are called to active duty for at least 180 days.

Roth IRAs are individual retirement accounts that allow you to put after-tax dollars into your account, which means that you do not have to pay taxes upon meeting the withdrawal age.

What's the IRA withdrawal age? Like a traditional IRA, you must wait until you are 59½ to withdraw your money, but there are exceptions to the early-withdrawal penalty. In addition, IRA withdrawal rules allow you to take out the money you have contributed to a Roth IRA (but not the earnings), even before  retirement. That's because you have already paid taxes on those funds. 

Roth IRA withdrawal rules state that in order to avoid paying penalties, you must wait at least five years to make a withdrawal. However, if you take a distribution of Roth IRA earnings before age 59½ the earnings may be subject to taxes and penalties. 

If you have money in a Roth IRA for less than five years, your earnings may be subject to taxes but not penalties if you are at least 59½. On the other hand, if you've already met the five-year holding requirement, you can withdraw money from your Roth IRA with no taxes or a 10% penalty at age 59½.

Taking a distribution of Roth IRA earnings before the account is five years old or before you reach the age of 59½, your earnings may be subject to taxes and penalties. However, you may be able to avoid penalties (but not taxes) in the following situations:

Using the withdrawal to pay for a first-time home purchase (a lifetime maximum up to 10,000).

Like a traditional IRA, if you or your immediate family members want to pay for qualified educational expenses such as tuition, fees, books, supplies and required equipment, you can withdraw funds without penalty.

Birth or adoption expenses up to $5,000 can also be paid with your Roth IRA without paying a penalty.

If you suffer a total and permanent disability, you will be able to access money from your Roth IRA without penalty. If you pass away unexpectedly, your beneficiaries can also access money without penalties from your Roth IRA.

If you suffer a total and permanent disability, you will be able to access money from your Roth IRA without penalty. If you pass away unexpectedly, your beneficiaries can also access money without penalties from your Roth IRA.

If you experience a tax levy, you can claim a tax penalty exemption.

You may be able to take penalty-free distributions if you are a member of the National Guard or a reservist if you are called to active duty for at least 180 days.

You may also take a withdrawal without penalty for unreimbursedmedical expenses or health insurance (as long as you're unemployed).

It's worth mentioning that in the case of substantially equal periodic payments (SoSEPP), you can receive a distribution of funds from a traditional or Roth IRA or other qualified retirement plans prior to the age of 59½ and you won't incur IRS penalties in the case of withdrawals.

Below are the pros and cons of an early withdrawal from either retirement account.

Pros of early withdrawals:

Check with a financial advisor or accountant to see how IRA withdrawal rules would affect you in the event of such withdrawals.