IRA Withdrawal Rules for Retirees

Follow the rules to withdraw money from your IRA.
Follow the rules to withdraw money from your IRA. (Image: Ryan McVay/Photodisc/Getty Images)

The government created IRA accounts so that you can accumulate money to support your retirement. You have saved for several years, and now you want to retire. The IRS has established several rules to assure that you withdraw and pay the necessary taxes on all of the money in your traditional IRA during your lifetime.

Retirement Age

If you retire earlier than age 59½, the IRS charges an extra 10 percent penalty plus ordinary income tax on the money you withdraw from your traditional IRA. If the amount you withdraw, added to your other income, increases your tax bracket, you will take a serious tax hit on the money. The government does provide some exceptions, allowing you to withdraw money for a down payment on a first home, medical bills, disability or other exceptions. You must follow strict guidelines for these. Once you reach 59½, you can withdraw your money without penalties. You must pay ordinary income tax on these qualified distributions.

Required Minimum Distributions

The IRS intends that you withdraw and pay the taxes on all of the money in a traditional IRA during your lifetime. Consequently, beginning at the age of 70½ you must withdraw your required minimum distribution (RMD) each year. The IRS provides the formula for determining your necessary withdrawal. According to Smart Money, this formula divides your account balance at the end of the previous year by your life expectancy. You must pay normal income tax on the withdrawal. If you take more out of your account than necessary, you must still withdraw the right amount the next year. The year you reach the age of 70½, you can wait until April of the following year to withdraw the money. Each year after that, you must withdraw the required minimum before December 31.

More Than One Account

Many people have more than one traditional IRA account. In that case, you must figure out your RMD on each balance. Then you may withdraw from each account or add the totals and withdraw the whole amount from one account.

Penalties for Failure to Withdraw Your RMD

The IRS imposes a steep penalty for failure to withdraw your RMD. You must pay the normal tax on the required withdrawal. It then charges you a 50 percent penalty for failure to take out the required amount. Added to a 28 percent tax bracket, you may have to pay 78 percent tax on the funds you failed to withdraw.

Withdrawal From a Roth IRA

You have already paid taxes on the money in your Roth account. Consequently, if you retire early, you can withdraw your contributions at any time without owing taxes or penalties. The IRS treats earnings on Roth money differently. In order to withdraw any Roth earnings without owing a penalty, you must be 59½ years old and have had the account for at least five years. Once you meet these requirements, you can withdraw any amount of your money without owing taxes or penalties.

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