- What Happens When You Withdraw Money From a Traditional IRA?
- Is Interest Earned on a Traditional IRA Tax Exempt?
- IRA Vs. Roth IRA Certificates
- At What Age Can You Withdraw Money From an IRA Without a Tax Penalty?
- Taxes for IRA Rollovers to Roth
- What Percentage of Money Is Taken Out of IRA Withdrawls?
A traditional individual retirement account comes with a number of built-in tax advantages. You get to write off your contributions when you file your federal income tax return, and all the investments in your traditional IRA grow tax-deferred as long as the money stays in the IRA. You owe ordinary income taxes on any money you withdraw from your traditional IRA, but you can typically choose when to take those withdrawals.
Taxes and Penalties
All the money in your traditional individual retirement account belongs to you. You can withdraw that money at any time and for any reason, but that doesn't mean you should. Since you took a tax deduction when you contributed to your traditional IRA, the Internal Revenue Service considers all withdrawals from that IRA to be ordinary income. That money is taxed at your current tax rate in the year you take the withdrawal. If you are under 59 1/2, the IRS tacks on an additional early withdrawal penalty equal to 10 percent of the amount withdrawn.
The best time to withdraw money from your traditional IRA is after you retire and after you reach the minimum retirement age, which was 59 1/2 years as of 2012. In theory, your taxable income will be reduced after you retire, so you should be in a lower income tax bracket. Those tax-deductible contributions you made while in a higher tax bracket are then taxed at your lower, retirement-era tax rate.
You can tap your traditional IRA before you reach age 59 1/2 without getting hit with the 10 percent penalty under certain special circumstances. For example, if you have extraordinary unreimbursed medical bills that exceed 7.5 percent of your adjusted gross income for the 2012 tax year, you can use withdrawals from your traditional IRA to pay those bills. You can take a penalty-free withdrawal from your traditional IRA to buy or build a first home or to pay for qualified higher education expenses. You can withdraw money from your traditional IRA penalty-free if you become disabled. Although you don't have to pay the early withdrawal penalty, withdrawals from your IRA are still taxed as ordinary income.
When You Need It
The government provides tax advantages for your IRA to encourage you to save that money for your retirement years. Pulling money out of your traditional IRA early can be expensive. If you have other options to draw on that don't involve taxes or penalties, such as money in savings or other investments, you should consider using those funds first. You have to start taking distributions from your traditional IRA by the time you reach as 70 1/2 years, but before that, you have the choice of when to take withdrawals. While income tax and early withdrawal penalties are a major consideration, the best time to withdraw funds from your traditional IRA is when you need it.