When to Take Out an IRA?
Individual retirement accounts help you put aside money for retirement by giving you tax benefits. Knowing when you can remove money, and the penalties imposed if you remove money before you qualify, helps you make the most of the tax advantages. In addition, some IRAs require that you start taking out money at a certain age.
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Qualified Distributions
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You can begin taking distributions from your traditional IRA in the calendar year in which you turn 59 1/2. When you take a qualified traditional IRA distribution, you still have to include the withdrawal as taxable income, but you do not have to pay an early withdrawal penalty. With a Roth IRA, you can take qualified distributions once five tax years have elapsed since you created the account and if you reach 59 1/2 years old. Qualified Roth IRA distributions do not require income tax payments or penalties.
What's a Tax Year?
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Tax years differ from regular calendar years and are used in figuring qualified distributions from Roth IRAs. Tax years count from Jan. 1 of the first tax year you make your contribution, which may not be the same calendar year. You can make a Roth IRA contribution for the year as late as April 15 of the following year. For example, if you make your 2014 Roth IRA contribution on March 16, 2015, you would count tax years from Jan. 1, 2014.
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Early Distributions
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You can remove money from your IRA before you meet the criteria to take a qualified distribution for any reason, but in most cases you will owe a 10 percent early withdrawal penalty on top of the income taxes you would owe anyway. However, the IRS ignores this penalty in special circumstances, such as if you have medical expenses the exceed 7.5 percent of your adjusted gross income, college expenses for yourself or your child or a withdrawal of up to $10,000 if you qualify as a first-time home buyer for your house purchase. You can remove the contributions from your Roth IRA without penalty at any time.
Required Minimum Distributions
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For traditional IRAs, but not Roth IRAs, you have to start taking money out of the account in the year you turn 70 1/2. If you fail to remove the minimum amount, you must pay a tax penalty equal to 50 percent of the unwithdrawn total. The amount you must withdraw equals the value of your account at the close of the previous year divided by your life expectancy. Even though the IRS mandates these distributions, you must still include them as taxable income.
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