When Can I Withdraw From My IRA Without Penalties?
Generally speaking, you can start taking penalty-free withdrawals, or distributions, from your individual retirement account beginning the year you turn 59 1/2. However, you may be able to take a penalty-free distribution before then if you qualify for a penalty exception. Your tax burden ultimately depends on the type of IRA you have, why you need the money and how much you want to withdraw.
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The 59 1/2 Rule
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The Internal Revenue Service's age 59 1/2 rule states that you do not have to pay the 10 percent early withdrawal penalty on amounts you take after you reach that age. If you have a Roth IRA, withdrawals are tax-free from that point onward; if you have a traditional IRA, you must pay income taxes on withdrawal amounts.
The Five-Year Rule
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The five-year rule applies to Roth IRAs only, and overrides the 59 1/2 rule in some situations. You cannot take a qualified withdrawal from a Roth IRA unless your account has been open for at least five years. The clock starts ticking on Jan. 1 the year you make your first Roth IRA contribution. The IRS looks at all of your Roth IRA accounts as one, so as soon as you pass the five-year mark with the first account you opened, you are eligible to receive qualified withdrawals from them all.
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Roth IRA Penalties
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Qualified withdrawals from Roth IRAs are tax- and penalty-free. However, you can take tax- and penalty-free early withdrawals from your Roth IRA before you are 59 1/2, for any reason, as long as they do not exceed your total contributions, as opposed to your account's earnings. For example, imagine you contributed a total of $15,000 to your Roth IRA between 2009 and 2011. Assets you purchased with your contributions earned a total of $5,000. You can withdrawal up to $15,000 from your account in 2011 without tax or penalty, but you may be subject to both taxes and penalties if you need to dip into your $5,000 earnings.
Traditional IRA Penalties
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Generally speaking, you owe both the 10 percent early withdrawal penalty and income taxes on amounts you withdraw from your traditional IRA before you turn 59 1/2, unless you qualify for a penalty exception. This is true for all traditional IRA contributions you deducted from your income. Nondeductible traditional IRA contributions are not part of your tax basis, and you can withdrawal those portions any time without tax or penalties.
First-Time Homebuyer Credit
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As of 2011, you are allowed to withdraw up to $10,000 to pay for your first home, or that of your spouse, children, grandchildren, parents or grandparents. The $10,000 limit is a lifetime cap. If you have a traditional IRA, you must pay income taxes on the amount; if you have a Roth IRA, the distribution is both tax- and penalty-free, provided you meet the five-year rule.
Hardship Excpetions
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Hardship penalty exceptions allow you to avoid the 10 percent penalty on early withdrawals, although you might still owe income taxes on Roth IRA earnings. Hardship exceptions include disablement and death, should your account pass to your heirs. If you have outstanding medical bills that total more than 7.5 percent of your income, you can take a penalty-free IRA withdrawal to pay the remainder. If you are on unemployment for more than 12 straight weeks and need to pay your family's health care premiums, you also qualify for a penalty exception.
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