While planning for your future, you might be wondering where to invest your money for safekeeping and growth. After all, you’ve worked hard throughout your life to collect a nest egg for when you retire; you want to make sure you are making the most out of it.
When looking into different IRA accounts that you can contribute to, one thing you might take into consideration is the IRA withdrawal age and how that will impact you and your future. Luckily, TurboTax experts can help you understand IRAs at any point throughout the tax year, but we’ve also compiled a complete guide to understanding the ins and outs of withdrawing from an IRA account.
When Can I Withdraw My IRA Without Penalty?
Understanding when you are able to withdraw your IRA funds is a crucial part of deciding how you want to invest your money. Most IRA plans follow the same withdrawal patterns, but it’s important to know the distinctions of each plan.
Traditional IRA
For a traditional IRA, if you take a distribution before the age of 59.5, you will be taxed at your normal tax rate and penalized 10% of the distribution amount. Once you’ve hit the age of 59.5, you may start to take distributions without the 10% penalty, but you will still be taxed, as these funds went into your account with pre-tax dollars.
There are certain circumstances where you can take an early IRA withdrawal before the age of 59.5 and avoid the 10% penalty; these include:
- Qualified higher education expenses: This includes room and board, tuition, fees and supplies for yourself or your spouse, children and grandchildren.
- Home purchase: You can withdraw up to $10,000 toward the purchase of your first home.
- Birth or adoption of a child: You can withdraw up to $5,000 following the birth or adoption of a child.
- Medical expenses and health insurance premiums: You can take a distribution for unreimbursed medical expenses. These must exceed 7.5% of your adjusted gross income (AGI). You can also withdraw to pay for health insurance premiums for yourself, your spouse or your children when you are unemployed for 12 weeks or more.
- Substantially equal payments: If you take a series of distributions that are spread equally over your life, you can avoid the penalty. You must take one distribution per year and cannot modify the schedule until five years have passed or you become 59.5, whichever is later.
- Qualified reservist distributions: If you’re called to active duty for more than 179 days, you can take a penalty-free distribution, although it must be made during the period of active duty.
- Death or total and permanent disability: You can withdraw IRA funds without penalty if you become disabled, and if you die, your beneficiary or estate can withdraw without penalty.
Other IRA Accounts
There are a few other IRA types to keep in mind:
- Simplified Employee Pension (SEP) IRA: This type of account allows an employer to make retirement plan contributions to a traditional IRA that is established in the employee’s name. This is usually done by a small business or self-employed individuals.
- Savings Incentive Match PLan for Employees (SIMPLE) IRA: This plan is available to small businesses that do not have an alternative type of retirement plan. This is similar to a 401(k) plan, allowing for both employee and employer contributions.
The SEP-IRA and SIMPLE IRA work similarly to the traditional IRA plan. You can take distributions from these plans at any time; however, you will be subject to a 10% penalty and income taxes if you are under the age of 59.5, and just income taxes if over the age of 59.5. The same circumstances that might help you avoid the 10% penalty are in place with the traditional IRA plan.
It’s important to note that there is a 25% tax if you withdraw from your SIMPLE IRA in the first two years of the plan being open. This penalty takes the place of the 10% early withdrawal penalty stated above.
Roth IRA
Roth IRAs work a little differently than traditional IRAs, as they provide a little more leeway for the account owner. Unlike the traditional IRA, money contributed to your Roth IRA is post-tax, meaning that it is taxed before it goes into the account.
You can take a Roth IRA distribution on your contributions at any time without penalty or taxes. If you wish to withdraw your Roth IRA earnings, however, there are certain circumstances where there are no taxes or penalties:
- You must be age 59.5 or older, and
- Your Roth IRA account must be active for five years or more
If you wish to make a withdrawal on your earnings from your Roth IRA, are younger than 59.5 and the account is less than five years old, you owe both income taxes and a 10% penalty on distributions. You can avoid the 10% penalty if you meet one of the following criteria:
- Qualified higher education expenses: This includes room and board, tuition, fees and supplies for yourself or your spouse, children and grandchildren.
- Home purchase: You can withdraw up to $10,000 toward the purchase of your first home.
- Birth or adoption of a child: You can withdraw up to $5,000 following the birth or adoption of a child.
- Medical expenses and health insurance premiums: You can take a distribution for unreimbursed medical expenses. These must exceed 7.5% of your adjusted gross income (AGI). You can also withdraw to pay for health insurance premiums for yourself, your spouse or your children when you are unemployed for 12 weeks or more.
- Substantially equal payments: If you take a series of distributions that are spread equally over your life, you can avoid the penalty. You must take one distribution per year and cannot modify the schedule until five years have passed or you become 59.5, whichever is later.
- Qualified reservist distributions: If you’re called to active duty for more than 179 days, you can take a penalty-free distribution, although it must be made during the period of active duty.
- Death or total and permanent disability: You can withdraw IRA funds without penalty if you become disabled, and if you die, your beneficiary or estate can withdraw without penalty.
If you wish to make a withdrawal on your earnings from your Roth IRA, are younger than 59.5 and the account is five years or older, you owe both income taxes and a 10% penalty on distributions. You can avoid the 10% penalty and taxes if you meet one of the following criteria:
- Home purchase: You can withdraw up to $10,000 toward the purchase of your first home.
- Death or total and permanent disability: You can withdraw IRA funds without penalty if you become disabled, and if you die, your beneficiary or estate can withdraw without penalty.
If you wish to make a withdrawal on your earnings from your Roth IRA, you are 59.5 years or older and the account is less than five years old, you’ll owe income tax but not a 10% penalty.
If you wish to make a withdrawal on your earnings from your Roth IRA, are 59.5 years or older and the account is five years or older, you can withdraw earnings with no tax and no penalty.
How Much Can I Withdraw From My IRA?
Understanding when you can withdraw from your IRA is only one part of the equation; understanding how much you can withdraw from your IRA account is the second part in determining if you should invest in a traditional IRA or Roth IRA.
Traditional IRA
With a traditional IRA, there is no monthly or yearly limit on how much money you can withdraw; you can take as little or as much as you’d like or need. However, there are a few things to keep in mind before you tap into this account:
- If you are not yet 59.5 years old, you will be subject to income tax and potential penalties. These can add up quickly, potentially costing you more in the long run.
- The more you withdraw (especially during an early distribution), the less money you will have for your future.
- If you take a distribution that is more than you need, you might miss out on future gains.
Other IRA Accounts
The SEP-IRA and SIMPLE IRAs follow the same rules as above; there is no limit on how much you can withdraw, though it is important to be mindful of the same stipulations with regard to taxes and penalties.
Roth IRA
Similar to the above accounts, the Roth IRA account does not have a withdrawal limit; you can withdraw as much or as little as you’d like every month or year. Remember: You can withdraw your contributions tax- and penalty-free at any time, and you can withdraw your earnings without taxes and penalties once you’ve reached the age of 59.5 and the account has reached an age of five years.
When Do I Have to Start Withdrawing From My IRA?
Depending on the IRA account you have, you might need to start taking distributions from your account, even if you don’t necessarily need the money right away.
Traditional IRA
Because your hard-earned dollars are added to your traditional IRA account pre-tax, it’s not unreasonable to understand that the IRS would eventually want to start collecting taxes. To help ensure this, the IRS mandates required minimum distributions (RMDs) after a certain age.
The amount of distributions you must take is determined by the IRS; they divide the amount of the IRA account balance on December 31 of the previous year by your life expectancy. This money will be taxed as income at your current rate, and it’s important to know that if you miss an RMD, the IRS will penalize you 50% of the total amount that should have been withdrawn.
You must start taking RMDs by April 1 of the year after you turn 73 years old, even if you don’t need the money. The deadline each year to take these distributions is December 31. If you wish, you can always take more than the RMD, but do remember that all distributions are taxed as income at your standard tax rate along with any additional income you may have.
Other IRA Accounts
Similar to a traditional IRA, the SEP-IRA and SIMPLE IRA both require RMDs to be taken at the age of 73. Again, these are taxed as income at your standard tax rate, along with any other income you’ve made throughout the year.
Roth IRA
Unlike the above accounts, a Roth IRA account does not have an RMD clause. If you do not want to withdraw your funds at a certain time, you don’t have to — you can let the funds continue to grow tax-free for as long as you’d like.
It’s important to note that if you were to die, your beneficiaries (other than a surviving spouse) must take RMDs from the account after it’s inherited.
Do I Pay Taxes on My IRA Withdrawal?
Another important aspect of IRA withdrawals is the amount of taxes that you will need to pay, both during contribution and at the time of distribution.
Traditional IRA
Because traditional IRAs are funded with pre-tax dollars, these withdrawals are taxed as regular income based on your tax bracket for that tax year. Unfortunately, while you can avoid the 10% penalty by waiting until the age of 59.5 to withdraw from your IRA account, you will not be able to avoid the taxes.
Your traditional IRA deduction is considered tax-deductible if you are not covered by a retirement plan, such as a 401(k), from your employer. If you are married, your spouse also cannot be covered by a retirement plan in order for these deductions to be tax-deductible.
Other IRA Accounts
Similar to a traditional IRA, SEP-IRAs and SIMPLE IRAs are also funded by pre-tax dollars; therefore, when making a withdrawal, you must pay income tax at your standard tax rate.
Roth IRA
Because Roth IRA contributions are funded with post-tax dollars, these contributions can be withdrawn tax-free. Due to this, your withdrawals are not tax-deductible. In addition, qualified distributions (those that are taken after you’ve reached age 59.5 and the account has been open for five or more years) are not subject to taxes either.
Understanding the IRA withdrawal age, no matter the type of IRA, is important to maximize the money in your pocket and avoid unnecessary penalties.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
