There are two types of individual retirement accounts. A traditional IRA lets you deduct contributions from your taxable income, but you will have to pay taxes when you withdraw the money. A Roth IRA is funded with after-tax money. With a Roth, you pay taxes before you contribute and will only owe taxes on the earnings, not your contributions, when you withdraw money.
Basic IRA Withdrawal
You can withdraw money without penalty from a traditional IRA once you reach age 59 1/2, and you must begin taking money out at 70 1/2. Withdrawals before 59 1/2 may be subject to a 10 percent penalty from the Internal Revenue Service. That's in addition to the income taxes you will owe on any withdrawal from a traditional IRA.
There are some exceptions to the 10 percent penalty. You can withdraw traditional IRA money before age 59 1/2 up to $10,000 for a first-time home purchase, if you become disabled, for medical expenses over 7.5 percent of your gross income, for some qualified educational expenses and for health care insurance if you've been getting unemployment compensation for at least 12 weeks.
You can elect withdrawals under a "substantially equal periodic payments" provision, which requires you to take a specified amount regularly. You must agree to take these payments for at least five years or until you are 59 1/2. You won't be charged a penalty but must pay taxes on these withdrawals as regular income. Most financial advisers recommend against this option.
Roth IRAs have different withdrawal rules. Because Roth contributions are made with post-tax money, you can withdraw them at any time with no tax and no penalty. However, if Roth contributions were rolled over from a traditional IRA, you can't withdraw them for five years or the 10 percent penalty will apply. You also will owe tax on Roth IRA earnings, but investment gains are withdrawn only after your contributions are exhausted.