Retirement accounts with tax benefits are governed by strict rules that can limit your access to funds. Withdrawals from an IRA made before the age of 59 1/2 are considered "early distributions" and may be subject to tax penalties. If you withdraw money from an IRA after age 59 1/2, you don't face an early withdrawal penalty, but you do typically owe income tax on withdrawals.
IRS Withdrawal Basics
IRA withdrawals must be included in taxable income for the year if you did not pay taxes on the money in the year you made the contribution. Traditional IRA contributions are tax deductible unless you are covered by a retirement plan at work and have high income, so you typically owe income tax on traditional IRA withdrawals. Withdrawals from SIMPLE IRAs and SEP IRAs are also subject to income tax upon withdrawal. If you make nondeductible contributions to a traditional IRA, you don't pay income tax on contributions upon withdrawal, but you do pay income tax on withdrawals of investment gains.
Traditional, SIMPLE and SEP IRAs are subject to "required minimum distributions" when you reach age 70 1/2. RMDs make you take out a percentage of your IRA funds each year, based on your age at the end of the year. The percentage you have to withdraw increases as you age, so your account balance is likely to fall eventually even if your investments continue to grow. If you fail to make a required withdrawal, the amount you don't take out is taxed at 50 percent.
Roth IRAs differ from other types of IRAs in that you cannot make pretax or tax deductible contributions. Since your contributions come out of after-tax income, you don't owe income tax on withdrawals of contributions, but you also do not pay tax on withdrawals of investment gains as long as you take the money out after age 59 1/2 and at least 5 years after you first open your account. Roth IRAs do not require minimum distributions.
Contributing After Age 70 1/2
You can't contribute to a traditional IRA after required minimum distributions begin. SIMPLE and SEP IRA contributions can continue after age 70 1/2 if you continue working, but you still have to make required minimum distributions each year. You can continue to contribute to a Roth IRA as long as you have earned income.
- Internal Revenue Service: Traditional IRAs
- Internal Revenue Service: Roth IRAs
- Internal Revenue Service: Savings Incentive Match Plans for Employees (SIMPLE)
- Internal Revenue Service: Retirement Plans FAQs regarding SIMPLE IRA Plans
- Internal Revenue Service: Retirement Plans FAQs regarding SEPs
- Internal Revenue Service: Retirement Plans FAQs Regarding Required Minimum Distributions