You can deduct traditional IRA contributions when you file your taxes for the year. All withdrawals from this type of account are taxable as income. Principal distributions from a Roth IRA are not subject to tax. Earnings withdrawals are subject to tax, and possibly, penalty. The Internal Revenue Service establishes IRA withdrawal rules.
Age 59 1/2 Rule
If you take any money out of a traditional IRA or earnings money from a Roth before reaching age 59 1/2, you have to pay a penalty tax of 10 percent on the withdrawn amount. This is in addition to the income tax that must be paid on these distributions. If you use the money to pay for excess medical expenses or higher education costs, among other exceptions, you can avoid the penalty.
Age 70 1/2 Rule
When you turn 70 1/2, the IRS requires that you begin taking distributions from a traditional IRA. (At the same age, you have to stop making contributions to this account type.) The IRS even determines how much you take out and when. Its required minimum distributions must be withdrawn by December 31 each year. The RMD amount is calculated by dividing your end-of-year IRA account balance by a life-expectancy figure from an IRS table. The life-expectancy figure drops each year, so you must calculate the RMD anew each year.
If you do not withdraw the RMD by the deadline any given year, the IRS levies a 50 percent penalty on the amount you should have withdrawn but did not. For example, say your RMD is $4,000 and you take out only $2,000. You will owe the IRS a penalty of $1,000. The IRS does offer you the opportunity to explain the failure to comply in writing. Should you take advantage of this option, include the RMD amount you failed to withdraw with your letter of explanation.
Roth Five-Year Rule
To withdraw Roth earnings tax- and penalty-free, you must have owned a Roth for at least five years and turned 59 1/2. If you take earnings money from a Roth after you reach age 59 1/2 but before the five-year mark has passed, you'll owe only income tax on the distribution amount.