At What Age Can I Draw Funds From an IRA Without Paying Taxes or Penalties?

by Herb Kirchhoff

    Individual Retirement Accounts, commonly called IRAs, provide favorable tax treatments that allow you to build your savings for retirement faster than with other forms of saving accounts. You may owe taxes and/or penalties when you take money out of an IRA. But any taxes and penalties will depend on your age when you take an IRA distribution and whether you own a tax-deferred IRA or a Roth IRA.

    If you own a tax-deferred IRA and took a tax deduction on your contributions to that IRA, you will owe income tax when you take money out of the account, no matter how old you are.
    If you are between age 59 1/2 and 70 1/2, you won’t incur any penalties on distributions from a tax-deferred IRA. The rules impose penalties for taking money out before age 59 1/2 and for failing to withdraw enough after 70 1/2.

    If you made any contributions to your tax-deferred IRA that you didn’t deduct from your taxes, you won’t owe taxes on that money when you take it out. Distributions you take from your account are apportioned between your deductible contributions and any nondeductible contributions. You use Form 8606 to figure how to apportion your distributions between taxable and nontaxable amounts.

    Penalties on withdrawals from a tax-deferred IRA depend on your age. If you withdraw funds from the IRA before age 59 ½, you will owe a 10 percent tax penalty on top of the income tax. If you are over age 70 ½ and fail to take your required annual minimum distribution, you will owe a tax penalty equal to 50 percent of the amount you should have withdrawn, as well as owe income tax. Each year’s mandatory minimum distribution is figured by dividing your IRA balance by remaining life expectancy based on Internal Revenue Service longevity tables.

    If you own a Roth IRA, you can take distributions tax free if you are over age 59 ½ and you have had at least one Roth account open for five years or more. If you withdraw funds from your Roth IRA before age 59 ½ or take out money at any age from a Roth account open for less than five years, you could owe income tax and an early withdrawal penalty on your earnings, depending on how much you take out. If the amount of your early withdrawal is less than your total direct Roth contributions, you won’t owe tax or penalties.
    If you convert a regular IRA to a Roth IRA, you must wait five years before you can take tax-free withdrawals. If you jump the gun and withdraw money before that, you could be hit with a 10 percent penalty on the entire withdrawal. If your early Roth withdrawal is large enough to cut into the account’s investment gains, that portion will also be subjected to income tax. Any early Roth withdrawals must be reported to the IRS on Form 8606.

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    About the Author

    Herbert Kirchhoff has over 35 years experience as a newspaper and newsletter reporter, writer and editor, with 27 of those years spent on telecommunications industry policy issues. Kirchhoff has a B.A. in journalism from Rider University in New Jersey and has been published in the "Trenton (N.J.) Times" and in "Communications Daily" and State Telephone Regulation Report, Washington, D.C.

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