5 Things You Must Know About Taking Money Out of IRAs

From early IRA withdrawals to required minimum distributions

It's great to save for retirement, but what rules apply when you go to take the money back out? There are five main types of IRA withdrawals; early, regular IRA withdrawals, required minimum distributions, Roth IRA withdrawals, and IRA rollovers or transfers. Learn more about each type of IRA withdrawal below.

Early IRA withdrawals

Broken egg due to early withdrawals
Early IRA withdrawals are subject to additional taxes. blackred

IRAs were designed to be an account you use to save for retirement. Because the IRS wants you to save it for retirement, if you withdraw funds from a Traditional IRA early, which is before you reach age 59 1/2, a 10% early withdrawal penalty tax applies. You report the withdrawal amount on your 1040 tax form and ordinary income taxes apply also. There are a few exceptions to the penalty tax, but no exceptions to the income tax. If your situation falls under the IRA withdrawal hardship rules then you may be able to avoid the penalty tax portion. Roth IRAs are a little different. I cover that type of account below.

Normal IRA distributions

taxes on IRA distributions will be included on your 1040
Regular distributions on your IRA are taxable. Tim Boyle / Staf

Once you reach age 59 1/2 you can take funds out of your Traditional IRA and no penalty taxes apply. These are considered to be normal IRA distributions because you are using them for your retirement years. The amount withdrawn is included in your taxable income by reporting it on your 1040 tax form when you file. The total amount of tax you pay on an IRA distribution will depend on the total amount of income and deductions that you have that year. If your income is high, you'll pay taxes at a higher tax rate. If you have more deductions than income, you may pay no tax at all! 

Required minimum distributions

Couple deciding what to do with their RMD.
At age 70 1/2 you are required to take money out of your IRA. Alistair Berg

When you reach the age of 70 ½ the IRS requires that you start taking distributions from your qualified retirement accounts (IRA accounts, 401(k)s, 403(b)s, 457 plans or other tax-deferred retirement savings plans like a TSA, SEP or SIMPLE). These required minimum distributions are referred to as RMDs. The amount you have to take changes each year as it is based on a formula which uses your age and the prior year-end account balance. You are not required to take an RMD from a Roth IRA if you are the Roth IRA owner. If you inherit a Roth you will have to take an RMD each year. 

Roth IRA withdrawals

An egg with Roth on it on top of a stack of hundred dollar bills.
Roth IRA withdrawals may be tax free. Jason York

There's a mass of messy information out there about Roth IRA withdrawals. Are they tax-free or not? The great thing about a Roth is you can withdraw your original contributions (but not conversions or rollover amounts) at any time, at any age, with no taxes or penalties. However, if you withdraw the investment gain portion early (before age 59 /12 or before you have had the Roth for five years), taxes and penalties will apply. If it is a designated Roth account in a 401(k) plan, the rules are different. If you follow the rules and use the Roth for your later retirement years, withdrawals will be tax free

Rollovers and transfers

So many questions about IRA rollovers.
Withdrawals and transfers must be done right to avoid taxes. samxmeg

When you rollover a qualified retirement account (like a pension plan lump sum, 401(k), or 403(b)) to an IRA, technically this is not a withdrawal. When you follow the rules you can rollover accounts with no taxes or penalties regardless of age. When you move money from one IRA to another that is a transfer. If your IRA money goes right from one financial institution to another and is never in your hands, transfers are tax and penalty free also. If the IRA funds come to you and you are planning on putting them back in your account within 60 days - you can only do that once in any 12 month period or it may be considered a taxable distribution. Be sure to learn the rollover and transfer rules before moving money around. Mistakes in this area can be expensive.