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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 IRA withdrawal rules

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to contribute pre-tax dollars into a retirement account toward investments that can grow tax-deferred until they are withdrawn.

Withdrawal age

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 72 and over, you must begin taking annual required minimum distributions (RMDs) from your traditional IRA, which must be withdrawn by April 1 of the year after you reach age 72. 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 If you don’t make withdrawals, you’ll have to pay a 50% penalty on the amount you should’ve withdrawn.

10% early withdrawal penalty

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.

When can you withdraw money from a traditional IRA without penalty?

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

First-time home purchase

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.

Educational expenses

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.

Disability or death

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.

Medical expenses

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.

Birth or adoption expenses

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

Health insurance

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.

Involuntary distribution

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

Military exceptions

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 IRA withdrawal rules

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.

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.

What is the Roth five-year rule?

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.

Taxes and Penalties on Roth IRA Withdrawals

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.

Qualified Exceptions

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:

First-time home purchase

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

Qualified education expenses

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

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

Death or disability

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 from your Roth IRA.

Unreimbursed medical expenses or health insurance

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

It’s worth mentioning that in the case of a substantially equal periodic payment (SEPP), 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.

Pros and Cons of IRA Withdrawals

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

Pros of early withdrawals:

  • You can avoid penalties: These funds can act as an alternative to your emergency fund if you meet the requirements for an exception
  • You may avoid debt: If you use money to help you pay for medical expenses, withdrawing early can keep you from incurring debt

Cons of early withdrawals:

  • You may face penalties: You may face a 10% penalty. Even with exceptions, you may still have to pay tax on your withdrawals
  • Limited time to repay: If you plan to repay your withdrawal, you’ll have a 60-day period in which you must deposit funds back into your account
  • May never “catch back up”: The maximum total annual contribution for all your IRAs combined is $6,000 if you’re under age 50 and $7,000 if you’re 50 or older. You’ll miss out on compounding interest if you withdraw your money

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

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