Traditional IRA Withdrawal and Distribution Rules

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A traditional IRA can be a great retirement savings tool, but it can also be a great tax planning tool 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Traditional IRAs let you put money away that will grow tax-deferred until it's withdrawn.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 Service imposes some strict rules for withdrawals, and you can be charged with tax penalties from 10 to 50 percent if you don't follow them.

Taxable Traditional IRA Withdrawals

With the exception of the recovery of previous nondeductible 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.

Aside from paying your regular income tax rate, you can take withdrawals at any time from age 59½ through age 70 without restriction.

The Early Distribution Penalty

The real issue with traditional IRA withdrawals occurs when they're taken before age 59½. In addition to the 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.

The early distribution penalty can result in cutting the value of the withdrawal almost in half for some taxpayers.

Exceptions to the Penalty

Penalty-free withdrawals from a traditional IRA prior to age 59½ are permitted 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 totally and permanently disabled.
  • You use an early withdrawal to pay for unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income (AGI) or more than 10 percent if you under age 65.
  • 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 used to pay for qualified higher education expenses for yourself, your spouse, dependents, or beneficiary.
  • Your withdrawal of up to $10,000 is used for a qualified first-time home purchase within 120 days of the time you take it. 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.
  • You roll the proceeds over into another IRA within 60 days of your withdrawal.

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 all the potential future investment growth of this retirement plan money.

Delaying Your Traditional IRA Distributions

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 required minimum distribution (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 RMD annually going forward, and you can no longer make contributions.

Your RMD is calculated as your account balance as of the end of the preceding calendar year divided by your distribution period as determined by the IRS in its Uniform Lifetime 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 to obtain the most up-to-date advice.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.