- You can withdraw from a Traditional IRA account at any time.
- When taking a distribution, regular income taxes will apply.
- If taking a withdrawal before age 59 ½, a 10% penalty may apply.
- Minimum required distributions must be taken after the age of 70 ½.
Despite the benefits of tax-deferred income, some employees are still hesitant to open a Traditional IRA. They may be apprehensive about IRS rules around withdrawing from an IRA account, so they choose other types of savings accounts, forgoing significant tax benefits and incentives.
Traditional IRA Withdrawal Rules
Fortunately, putting money into a Traditional IRA does not mean it’s locked away until you reach a certain age. IRA distribution rules make it possible to take withdrawals if you have an urgent financial need. You can withdraw money from your IRA at any time, and withdrawals are treated as income under normal income tax regulations.
There is no penalty for taking an IRA distribution if you are age 59 1/2 or older. However, you may be subject to a 10% tax penalty for early distribution if you withdraw before this age. You may still be able to avoid this penalty if one of the following situations apply:
- You are purchasing your first home.
- You are paying qualified education expenses.
- You have died and your estate or beneficiaries are taking the distribution.
- You have become disabled.
- You have qualified unreimbursed medical expenses.
- You are using the funds to pay health insurance premiums while you are unemployed.
IRA distribution regulations have been developed to ensure that workers can comfortably save for retirement, knowing that accounts are accessible if necessary. While a 10% tax penalty may apply to early IRA withdrawals, most significant expenses are accounted for under the penalty exceptions.
IRA Minimum Distribution
Once you reach the age of 70 1/2, you must take a required minimum distribution (RMD) from your IRA. There are no exceptions to this rule, even if you are still working and don’t necessarily need the money. Failing to take the RMD by the required deadline can result in a 50% tax penalty on the RMD amount that was not taken.
To calculate your RMD, use the basic formula provided by the IRA: divide the account’s ending balance on the last day of the previous year by the estimated distribution period. The estimated distribution period is based on life expectancy tables available from the IRS. Separate calculations are used when the account is exclusively for the benefit of the owner (most common), when the account is for the benefit of another person (usually a spouse), and when the account is for the benefit of a spouse more than 10 years younger than the IRA account holder.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.