IRA distributions and withdrawals

An Individual Retirement Arrangement (IRA) is a good way to save for retirement. These types of accounts are meant to be used after a certain age and distribution

rules are in place to help make it easier to save and not so easy to dip into accounts for less important expenses.

Early IRA withdrawal penalties exist

An investor does have access to the funds in their IRA at any time, but unless they are at least 59 ½ years of age or meet other exceptions, the funds from IRAs that are withdrawn early are penalize and taxed in the year they are withdrawn. The penalty for an early, unqualified withdrawal is 10 percent of the amount withdrawn. It is then taxed at the normal tax rate for the investor for that year.

Many exceptions to the IRA withdrawal penalty

The exceptions to the rule that an investor must be at least 59 ½ are many. If the owner of the IRA becomes disabled or if they have medical expenses for which they are not reimbursed that exceed 7 ½ percent of their adjustable gross income, then IRA funds can be used free of penalty.

Medical premium withdrawals

In the event the IRA account holder becomes unemployed for more than 12 weeks funds from an IRA can be used to pay medical premiums. There is however a lifetime limit of $10,000 for this kind of expenditure.

IRA withdrawals for education

Certain qualified expenses related to higher education for the investor and eligible family members can also come from IRA funds free of penalties. Also if there are taxes due on the IRA and the Internal Revenue Service (IRS) has placed a lien on the account, then funds from the account can be used to pay those taxes.
 

Beneficiaries face no IRA withdrawal penalty

If the owner of the IRA dies before depleting the account, the beneficiaries do not have to pay a penalty to withdraw those funds. In all cases, when funds are withdrawn they are considered income for that tax year and they become subject to regular income taxes.

Mandatory IRA distributions at retirement

Traditional IRAs differ greatly from the Roth IRA in their mandatory withdrawal requirements. By April 1st of the year following an account holder’s 70 ½ birthday, they are required to withdraw a certain percentage of the IRA each year. Failure to do so, means the portion that is not withdrawn as required will be taxed an excise tax of 50 percent. Roth IRAs have no such mandatory withdrawal requirements and can be kept as IRA accounts indefinitely.
 

IRA distributions updated

The mandatory distribution rules were revised in 2002 to reflect longer life expectancies and help make it so an account holder’s heirs are not burdened with heavy taxes resulting from the owner not withdrawing enough before they died. Careful investors can use the deadline of April 1st to split withdrawals between two tax years so that the taxes they pay are minimized. The IRS has tables that help determine how much must be withdrawn each year. The table has the account holder’s age and then a number with a life expectancy or how many more years the account holder will probably live to divide by. For example, on the table a 79 year old is expected to live 19.5 more years. If this person has an IRA with a balance of $30,000 then they are required to withdraw approximately $1,538 (30,000 divided by 19.5).