IRA Distribution Waiting Period

by W D Adkins

    Individual retirement accounts offer some hefty tax breaks as an incentive to save for your retirement years. The tax advantages vary depending on whether you have a traditional or Roth IRA. Something all IRAs have in common are waiting periods. If you take distributions from an IRA early, the Internal Revenue Service might levy a stiff penalty on the withdrawn money.

    Traditional IRAs

    Money you put into a traditional IRA is normally tax-deductible. You pay taxes on contributions and investment earnings only when you withdraw them from the account. There’s no minimum time before you can take a distribution of money from a traditional IRA. However, you are supposed to wait until you are 59 1/2 years old before removing any money. If you pull money out early, you might have to pay a 10 percent penalty in addition to ordinary income taxes.

    SIMPLE IRAs

    A Savings Incentive Match Plan for Employees is an employer-provided IRA to which both employers and employees make contributions. For the most part, distributions are subject to the same rules as distributions from a traditional IRA. However, there are additional waiting requirements. You may not make a tax-free rollover of SIMPLE IRA money to a non-SIMPLE retirement account until two years after you start participating in a SIMPLE plan. In addition, if you make an early withdrawal during this two-year waiting period, the normal 10 percent penalty jumps to 25 percent.

    Roth Qualified Distributions

    There’s no deduction for Roth IRA contributions. Consequently, you can take them out at any time – there is no waiting period. Investment earnings are supposed to stay in a Roth until it is at least five years old, measured from Jan. 1 of the year you open the account. Once this waiting period is over, all distributions of earnings are qualified -- meaning tax-free -- as long as one of four conditions is satisfied. Qualifying conditions are that you are 59 1/2, that you become permanently disabled, or that up to $10,000 is used for fixing or buying a first home. The last condition is that distributions from an inherited Roth IRA are qualified once the five-year waiting period is complete.

    Rollover Waiting Period

    When you roll over money from another retirement account into a Roth IRA, you have to pay income taxes on the transferred funds. For this reason, rollover money is not subject to income taxes when withdrawn. However, to pull rollover money out of a Roth IRA you must wait at least five years from the date of the transfer or until you turn 59 1/2, whichever comes first. Otherwise, the withdrawn money might be subject to the 10 percent penalty.

    Exceptions

    The IRS does not charge the penalty on early distributions from traditional IRAs or unqualified distributions from Roth IRAs if the reason for the withdrawal meets one of its exception requirements. You still have to pay ordinary income taxes. Allowable exceptions include certain medical expenses or the payment of health care premiums while you are unemployed. There’s also no penalty if the money is for buying or repairing a first home, for qualified education expenses, to pay an IRS levy, for certain annuity payments or if you become disabled. Inherited IRAs are exempt from the penalty, as are qualified reservist distributions.

    About the Author

    Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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