When Can an IRA Be Withdrawn?
IRAs are accounts that allow you to defer income taxes on all your investment earnings until retirement. Traditional IRAs defer the tax on both the contribution and the investment earning. They then tax the entire withdrawal. The Roth IRA accepts after-tax contributions but does not tax the withdrawals.
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Time Frame
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Both traditional and Roth IRA accounts do not allow ordinary withdrawals until age 59 1/2. This age is determined, by the IRS, to be the normal retirement age for individuals. With traditional IRAs, withdrawals must commence by age 70 1/2.
Significance
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IRAs limit withdrawals due to the fact that they provide special tax benefits. Traditional IRAs are not taxed on any of the contributions to the account. Roth IRAs are not taxed on any of the distributions. The withdrawal limits prevent individuals from getting a tax benefit and using the money in their account for purposes other than retirement income.
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Warning
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If you attempt to make ordinary withdrawals prior to age 59 1/2, you will be subject to a 10 percent penalty. For traditional IRAs, the penalty is on the entire withdrawal amount. For Roth IRAs, the penalty is on the investment earnings. However, with Roth IRAs, you are allowed to withdraw your contribution amount first.
Misconceptions
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A common misconception is that you can never withdraw money from an IRA prior to age 59 1/2. This is true for ordinary withdrawals. But special withdrawals for medical expenses or a down payment on your first home are allowed. Additionally, withdrawals from your IRA are allowed under IRS rule 72t. You may liquidate your IRA account by making equal and substantial withdrawals. The withdrawals must be based on your life expectancy at your current age and must continue until age 59 1/2 or the IRA account is depleted.
Considerations
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When making withdrawals from your IRA, keep in mind that the purpose of the account is to fund your retirement. Unless you need money for an emergency, you should keep the IRA intact. Even for hardship withdrawals or withdrawals for a first home purchase, IRA funds should be a last resort.
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