Withdrawing From an IRA

If you’re looking for money to pay off your debt or accomplish another big financial goal, you may consider the funds you’ve put in your IRA or individual retirement account. Be care, depending on the type of IRA, your age, and how long you’ve had the account, you may have to pay penalties on money you take from the IRA.

Once you put your money in an IRA, a traditional IRA at least, you’re expected to keep the money there until you reach age 59 ½. And at age 70 ½, you’re required to withdraw at least a minimum amount from your IRA each year. Before that time, you could face penalties for withdrawing your money too soon.

Roth IRA vs. Traditional IRA Withdrawals

There are two basic types of IRAs. The traditional IRA allows you to contribute pre-tax money and then pay taxes on the contributions and earnings when you withdraw the money once you reach retirement age. Most early withdrawals are penalized.

The Roth IRA, on the other hand, takes contributions from income that’s already been taxed. For that reason, withdrawal of your contributions is always tax-free. You won’t even pay a penalty on the withdrawals made before age 59 ½. However, interest earnings on your contributions are taxable and subject to penalty if they’re made prematurely.

Penalty-Free Withdrawals

In general, if you withdraw money from your IRA before you turn age 59 ½, you’ll have to pay a 10% early withdrawal penalty. But, there are some exceptions to the rule if you use the withdrawal for:

The purchase of your first home, there’s a $10,000 maximum on this type of early withdrawal.
Qualified education expenses for you, your spouse, your kids or grandkids.
Disability expenses when you’re not able to work.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Health insurance payments if you’re unemployed and you’ve received 12 consecutive weeks of unemployment benefits.

While these withdrawals are exempt from the 10% early withdrawal penalty, you’ll still be taxed if the withdrawal is from a traditional IRA. With Roth IRA withdrawals, the earnings and not the original contributions are taxed.

Required Minimum Distributions

After you turn age 70 ½, you’re required to take a minimum required distribution from your IRA each year. The amount is based on your life expectancy of you and the beneficiary of your account. While you’re younger, your required minimum distributions are low. But as your life expectancy gets lower, the minimum required distribution goes up. If you fail to make your required minimum distribution, you’ll be penalized 50% on the amount you were supposed to withdraw.

You still have pay taxes on withdrawals from a traditional IRA, even those you make after age 70 ½. These withdrawals are taxed at your current tax rate.

Borrowing From Your IRA

You can take a short-term loan from your IRA and avoid taxes and penalties, but you have to be able to replace the money within 60 days. The clock starts ticking the day after you withdraw the money. To be on the safe side, you may want to replace your withdrawal after 55 days instead of waiting the full 60. If you miss the deadline, the withdrawal will be treated as a withdrawal and will be subject to tax and penalties. You can only do this once a year so don’t abuse the ability.

Source: IRS.gov