Rules for IRA Withdrawals After Age 59 1/2
Individual Retirement Accounts incentivize retirement savings by providing tax benefits to the money in the account. However, to prevent the abuse of these account for money not used for retirement savings, the Internal Revenue Service sets limits on when qualified withdrawals can be taken from the account. Knowing how your age and other factors affect the withdrawals will help you make better financial decisions regarding your IRA.
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Additional Criteria for Roth IRAs
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For traditional IRAs, the IRS requires only that you be 59 1/2 to take qualified withdrawals from your account. For qualified distributions from traditional IRAs, the money you withdrawal does not incur any penalties, but must be added in to your total taxable income for the year because traditional IRAs are tax-deferred accounts.
However, the IRS adds an additional requirement for Roth IRAs; your first Roth IRA contribution must have been at least five tax years before taking the distribution. Tax years start on Jan. 1 of the first tax year you made a Roth IRA contribution. If you do not meet this criterion, the IRS will treat your Roth IRA distribution after age 59 1/2 as a nonqualified distribution, meaning it may be subject to income taxes and tax penalties. Qualified Roth IRA distributions you take do not count as taxable income. However, if your distribution from a Roth IRA is not qualified because of the five tax-year rule, you can withdraw contributions tax-free, but any earnings withdrawn will be taxed and subject to a 10 percent early withdrawal penalty.
Required Distributions
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Traditional IRAs require you to take minimum required distributions from the account every year once you reach age 70 1/2. The amount depends on the value of your traditional IRA, as of the end of the previous year, as well as your life expectancy. Your financial institution will often calculate this amount on your behalf, but you are responsible for making sure the amount is correct and taking the withdrawal. The IRS imposes a hefty 50 percent penalty for not taking required withdrawals. Roth IRAs do not require you to take required distributions at any age.
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Tax Reporting
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As of 2011, you must report all IRA withdrawals, including all withdrawals after age 59 1/2, on your income tax. Any year that you take an IRA withdrawal, you must use either Form 1040 or Form 1040A to file your income tax return. You report nontaxable distributions on either line 15a of Form 1040 or line 11a of Form 1040A. These distributions do not increase your taxable income for the year. Taxable distributions must be reported on either line 15b of Form 1040 or 11b of Form 1040A.
Considerations
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Just because you can take distributions from your IRA when you turn 59-1/2-years-old does not mean it is in your best interests to do so. As long as the money stays in the IRA, it continues to grow tax-free; once you take it out you must pay income taxes on the earnings. Therefore, if you do not have an immediate need for the money, consider leaving it in the account until you need it or you have to take minimum required withdrawals starting at age 70 1/2 for traditional IRAs. In addition, if you convert the money to a Roth IRA, you do not have to take any required distributions; you can take advantage of the tax-free growth even longer.
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