Rules governing the withdrawal of funds from a traditional individual retirement account depend on your age. If you're between 59 1/2 and 70 1/2, you have lots of flexibility. Outside that window, your withdrawals must fall within specific Internal Revenue Service guidelines or a tax penalty might be assessed. Roth IRA withdrawals carry their own set of rules.
Any traditional IRA distribution gets taxed as ordinary income. However, if you made after-tax IRA contributions, a proportionate amount of any distribution will be tax free. For example, if the balance of record for your IRA is $50,000, and you made $10,000 in after-tax contributions, you don't need to pay tax on 20 percent of your withdrawal. The balance of record is the total value of all your traditional IRA accounts on Dec. 31 of the year preceding the withdrawals. You must file Form 8606 any year you make after-tax IRA deductions. Form 8606 also must be filed to reconcile any distribution that includes after-tax contributions.
In addition to the regular tax on withdrawals, you'll pay a 10 percent early withdrawal penalty on any traditional IRA distribution before you turn 59 1/2. But penalty-free withdrawals are allowed for what the IRS calls "exceptions": disability, buying your first home, excessive medical expenses and medical insurance if you're unemployed, paying for postsecondary education, satisfying an IRS levy and active duty military service. Each exception carries its own set of rules. You also can avoid the tax penalty by setting up what the IRS calls substantially equal periodic payments. The rules governing early periodic payment withdrawals are strict, and once you set up a periodic plan, you must continue it for five years or until you hit 59 1/2, whichever comes last.
The year you reach 70 1/2, you must either begin taking traditional IRA distributions at a level specified by IRS rules or increase your yearly withdrawal amount to match that required minimum distribution, or RMD. If you have never taken any distributions, your first withdrawal is due by April 1 the year after you hit 70 1/2. After that, your required minimum distribution is due by Dec. 31 each year. But if you push your first distribution to April 1 of the next calendar year, you'll still be required to take another distribution by Dec. 31, which means you'll have two distributions in the same tax year.
To help you figure your RMD, the IRS provides a uniform lifetime table in the "additional material" section of Publication 590. The distribution will be based on the value of all your accounts covered by traditional IRA rules, which include workplace retirement plans, on Dec. 31 in the tax year before your first RMD. Although you must figure an RMD separately for each account if you haven't put them all in one account before you hit RMD age, the entire distribution can come from only one of the affected accounts. If your spouse is more than 10 years younger, Publication 590 includes a different table that results in a smaller RMD. You can withdraw more than your RMD in any year, but if you don't take out enough, the IRS can add a 50 percent penalty to the amount you should have taken.
There's an 11-year period in which you can take out whatever you want from your IRA — zero to 100 percent in any given year. Just remember IRA withdrawal rule No. 1: Except for after-tax contributions, any traditional IRA distribution gets taxed as ordinary income, including dividends and capital gains earned by the assets in the account.
Roth IRA withdrawals have fewer tax consequences. There are no taxes on withdrawals of contribution amounts and no taxes on any distributions if your distribution satisfies both the five-year requirement and the type of distribution requirement. The Roth IRA passes the five-year test on Jan. 1 of the fifth tax year after you open the account. If you made your first Roth contribution for 2007 on April 15, 2008, you will have satisfied the five-year requirement on Jan. 1, 2012, a little more than 3 1/2 years after your actual contribution. When you pass the five-year test for one Roth account, you've passed it for any Roth IRA in your name. A distribution is qualified if you're at least 59 1/2. The only other distribution types considered qualified are those paid to a beneficiary after your death and withdrawals you make as a first-time homebuyer or as a result of a disability.