Traditional IRA Withdrawal Rules, Regulations, and Contribution Limits

When Can You Withdraw Money From Your Traditional IRA Without Penalty?

A pile of money.
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A traditional IRA can be a great retirement savings tool, but it can also be a great tax planning tools with some immediate tax advantages for those who qualify.

Traditional IRAs let you put money away that will grow tax-deferred until it's withdrawn. You might also be able to take a tax deduction for your annual contributions to the account based on your modified adjusted gross income (MAGI) and whether you're covered by an employer-sponsored plan.

But in exchange for these benefits, the Internal Revenue Code imposes some strict rules for withdrawals, and you can be charged with penalties from 10 to 50 percent if you don't follow them.

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 you take them. That's the nature of the tax-deferred growth—taxes are simply delayed until you withdraw from the account.

Other than paying ordinary income tax, you can take withdrawals at any time from age 59½ through age 70 with no restrictions.

The Early Distribution Penalty

The real issue with traditional IRA withdrawals occurs when they're taken before age 59½. In addition to the ordinary income taxes that will come due, a 10 percent early distribution penalty is assessed if you haven't yet reached this age when you take your first IRA distribution.

This additional early distribution penalty can result in cutting the value of the withdrawal almost in half for some taxpayers. But there are several exceptions to this penalty.

Penalties are in addition to any income tax you would pay on the withdrawal according to your tax bracket.

Exceptions to the Penalty

You can take taxable but penalty-free withdrawals from your traditional IRA prior to age 59½ under certain circumstances. These circumstances are known as exceptions and they 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 for medical expenses that are more than 7.5 percent of your adjusted gross income (AGI) as of 2018.
  • You're unemployed for 12 weeks or more and you use the early IRA withdrawal to pay for medical insurance for yourself, your spouse, or your dependents. You must take the distribution no later than 60 days after you begin working again.
  • You begin to take substantially equal periodic payments on a regular distribution schedule. Be warned, however—you're locked in if you do this. You can't change your mind and pull the plug after you begin receiving payments.
  • Your withdrawal is pursuant to divorce and required by a qualified domestic relations order (QDRO).
  • Your withdrawal is used to pay for qualified higher education expenses for yourself, your spouse, children, grandchildren, or your spouse's children and grandchildren.
  • Your withdrawal up to $10,000 is used for a qualified first-time home purchase within 120 days of the time you take it. This $10,000 cap is over your lifetime. For example, you can do this twice for $5,000 each time. This exception includes building or rebuilding a first-time home.
  • You're a member of the National Guard or a reservist and you're called to active duty for a period of at least 180 days, with some restrictions.

Taking the early withdrawal from your IRA might not be your best financial move in some of these circumstances. You might dodge the additional 10 percent tax, but you'll lose growth opportunity—all the potential future investment growth of this retirement plan money.

You Probably Can't Pay It Back

There are annual limits to the amount you can contribute to a regular IRA, so you can’t make up a withdrawal later when you're on more solid financial footing, even if you're not subject to the 10 percent penalty. The limit for contributions is $5,500 in 2018, or $6,500 if you're age 50 or older. This increases in 2019, but not by much: $6,000, or $7,000 if you're age 50 or older.

These limits mean that you can't double up on your contributions in order to catch up.

Delaying Your Traditional IRA Withdrawal

Most retirement planning experts will advise you not to take an early withdrawal from your traditional IRA before age 59½, and they'll also urge you to take at least your RMD by the time you reach age 70½.

You can delay receiving distributions from your IRA plan and maximize the benefits of tax-deferred growth until April 1 of the year following the year in which you reach age 70½. You must then withdraw at least your required minimum distribution (RMD) annually going forward, and you can no longer make contributions.

Your RMD is generally calculated as your account balance at of the beginning of the year divided by your life expectancy as determined by the IRS in its Uniform Life Expectancy table.

The penalty for not withdrawing your RMD is 50 percent of the difference between what should have been distributed and what was actually withdrawn. So you might as well comply because you don't have to actually spend the money. You just have to withdraw it to dodge this 50-percent hit.

You can always put the money into another account. It just can't be a retirement account. Check with a financial adviser for your best options if you don't actually need the money.

Tax laws change periodically and you should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.