Retiring Smart: Know the IRA Withdrawal Rules
A Practical Guide to the Ins and Outs of IRA Withdrawal Rules
When you open and contribute to an individual retirement account (IRA), you're putting money away for the future. But the future can come more quickly than you expect. It’s smart to understand the rules for taking money out of your IRA when the time comes.
IRA withdrawal 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. 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 required minimum distribution each year, which is calculated by looking at your IRA balance and your life expectancy.
Things to think about when you take distributions from your IRA: You can take out more than the required minimum, but you want to be careful. "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, 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 before you contributed to the account, 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 initial contribution 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.
You should most likely avoid taking money out of traditional IRAs before retirement, as there can be penalties in addition to the obvious decrease in your retirement funds. There are certain exceptions to the penalties, such as certain college expenses, paying significant medical expenses (based on your income level), and making a first-time home purchase. Check with a financial advisor or accountant to see how IRA withdrawal rules would affect you in the event of such withdrawals.
Ally Bank, member FDIC