Traditional IRA Withdrawal Rules and Regulations

When You Can Withdraw Money from Your Traditional IRA

A pile of money.
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Traditional IRAs are not only a great retirement savings tool, but with their immediate tax advantages for those who qualify, they also make for great tax planning tools. Traditional IRAs offer investors a way to put away savings for retirement that will grow tax-deferred until withdrawn, which is a key to truly taking advantage of compounding interest. But traditional IRAs don't simply offer tax-deferral on the growth of your original investment, they also offer some investors (based on their modified adjusted gross income and whether they are covered by an employer-sponsored plan) the opportunity to take a tax deduction on their annual contributions to the account.

But in exchange for these tax benefits, there are strict IRS rules for withdrawals from traditional IRAs. So when considering a traditional IRA withdrawal, proceed carefully.

Taxable Traditional IRA Withdrawals

With the exception of the recovery of previous non-deductible contributions, all traditional IRA withdrawals are subject to ordinary income tax no matter when they are taken. That is the nature of the tax-deferred growth, which is simply deferred or delayed until withdrawn from the account. The real issues with traditional IRA withdrawals start when they are taken before reaching the age of 59½.

In addition to ordinary income taxes, an additional 10% early distribution penalty tax is assessed if you have not reached at least age 59½ when you take your first IRA distribution. For certain taxpayers, this early distribution penalty on top of their income tax bracket can result in cutting the value of the withdrawal almost in half, which means that taking withdrawals from your traditional IRA before reaching age 59½ is not generally advisable. That said, there are several exceptions to this early distribution penalty.

Exceptions to the Early Distribution Penalty

If you are under the age of 59½, you may make taxable, but penalty-free withdrawals from your traditional IRA under certain circumstances. These circumstances are known as exceptions and include the following scenarios:

  • You die and the account value is paid to your beneficiary
  • You become disabled
  • You use an early withdrawal to pay medical expenses that are more than 10% of your adjusted gross income
  • You are unemployed and use the IRA early withdrawal to pay for your medical insurance
  • You begin substantially equal periodic payments (see IRS code section 72(t))
  • Your withdrawal is related to a qualified domestic relations order (QDRO)
  • Your withdrawal is used to pay qualified higher education expenses
  • Your withdrawal is used for a qualified “first-home” purchase (up to $10,000)

    In some of these scenarios, taking the early withdrawal from your IRA may be your best financial move, but for most people, early withdrawals are not only penalized by the additional 10% tax, but also in lost growth opportunity.

    Lost Growth Opportunity Due to Early IRA Withdrawals

    In addition to penalties and taxes due upon an early IRA withdrawal, you lose all the potential future investment growth of this retirement plan money. Furthermore, since there are annual limits to the amount you can contribute to a regular IRA, you can’t make up a previous withdrawal later, even when you are on more solid financial footing. As such, you aren't just losing 10% of your withdrawal when you take an early distribution, but you are losing out on the tax-deferred growth that is often worth much more to you in the form of future retirement income.

    Delaying Your Traditional IRA Withdrawal

    You may delay receiving distributions from your IRA plan and thereby maximize the benefits of your tax-deferred growth until April 1 of the year following the year in which you reach 70½. Subsequently, you must withdraw at least your Required Minimum Distribution (RMD) annually.

    Your RMD is calculated as your account balance as of the beginning of the year in question divided by your life expectancy as determined by the IRS in its Uniform Life Expectancy table (unless your sole beneficiary is your spouse and he or she is more than ten years younger than you). The penalty for not withdrawing your RMD is 50% of the difference between what should have been distributed and what was actually withdrawn. So while most retirement planning experts will advise you not to take an early withdrawal from your traditional IRA before age 59½, they will urge you to ensure that you are taking at least your RMD by the time you reach age 70½.

    If you have questions about taking withdrawals from a Roth IRA, be sure to read this article about Roth IRA withdrawals.

    Updated by Scott Spann