Partial IRA Withdrawal
Your Individual Retirement Account assets are designed to supplement federal retirement income sources. IRA funds are accessible either in part or in whole at any time, though certain early distributions are subject to tax penalties. Taxation of a partial distribution is based on when the distribution is taken and for what reason.
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The When of Distributions
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Normal distributions start at age 59 1/2 for all IRA structures. This age threshold is the only eligibility requirement for traditional IRAs. Roth IRAs must additionally be owned and funded for at least five years before reaching normal distribution eligibility. Taking money out of the IRA prior to normal distribution eligibility results in an early distribution. Unless an IRS-approved exception exists, a 10 percent tax penalty is assessed on taxable portions of the distribution.
The Why of Distributions
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You don't need a reason to take money out of your IRA if you are eligible for normal distributions. You can take part or all of the funds out without penalty. If you don't qualify for normal distributions, you can avoid the 10 percent penalty if you qualify for an early distribution exception. IRA exceptions including using $10,000 for a first-time purchase of a house, or using the money to pay for tuition and other college expenses. Under certain hardship rules, partial withdrawals can be used for medical insurance payments when unemployed, or to pay unreimbursed medical costs exceeding 7.5 percent of your adjusted gross income.
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The How of Distributions
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Taking the partial distribution requires a distribution form. Unlike non-qualified investment accounts where you can call and ask for a liquidation, the IRA requires a distribution form to properly record the event with the IRS. A 1099-R is sent to you in January that must be used to add the taxable income to personal tax returns. If the distribution is an early distribution, with or without an exception, Form 5329 must also be filed to calculate the penalty or note the exception.
Considerations
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When looking at partial withdrawals from the IRA, don't take out more than you need. This seems like common sense, but taking out a few extra dollars to make sure you have enough is a reasonable thought when experiencing financial hardships. You could lose early distribution exception eligibility if you have more coming out than the cost of school, medical expenses or insurance premiums. Talk to you tax adviser before doing anything to ensure you are taking out what you need and addressing all tax implications.
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