At What Age Are You Not to Be Taxed on Your IRA?

Early-withdrawal penalties make you think twice before dipping into your retirement.

tax time image by Tom Oliveira from

Whether you have a traditional IRA, including SEP and SIMPLE plans, or a Roth IRA, you are subject to taxes when you start taking distributions regardless of your age. Traditional IRAs are tax-deferred funds: You get to write off deposits, but you pay income tax when you make withdrawals. With a Roth IRA, you have to pay taxes when you withdraw earnings, under certain conditions. Waiting to take distributions after you reach a certain age keeps you from paying an early-withdrawal penalty tax.

Traditional IRAs

Traditional IRAs are not employer-sponsored. Investors contact a financial institution directly to open and contribute to an account. When you have a traditional IRA, you may withdraw your funds at any time without justifying it. But if you have not yet reached the age of 59 ½ years, you will be assessed a 10 percent penalty tax in addition to regular income tax on the entire amount you withdraw. IRA rollovers are tax-exempt if you transfer the money from one account to another or if you deposit the contribution you took into a rollover account within 60 days of the withdrawal.


SIMPLE -- Savings Incentive Match Plan for Employees -- is a traditional IRA that employers who hire 100 or fewer staff may offer as a benefit. To be eligible for the retirement account, employees must have earned $5,000 at a minimum the year before. The company also has the option of contributing a figure that matches their staff’s deposits into their accounts. To avoid a 10 percent penalty tax for withdrawing from a SIMPLE IRA, you must wait until the age of 59 ½ years. Further, do not take any distributions within two years of setting up the account to prevent an additional 25 percent tax on your withdrawal. As with a regular traditional IRA, all withdrawals are taxed at your regular rate regardless of when you take them.


Another traditional IRA, the Simplified Employment Pension, or SEP IRA, is an account you can only open if offered by your employer or that you set up through a business that you own. Employees participating in this type of IRA must meet the eligibility age of 21 years and have been on the company’s staff for at least three years of the last five years. As with the other traditional IRAs, if you make withdrawals before you turn 59 ½ years old, the federal government assesses a 10 percent early-withdrawal fee on top of the usual income taxes.

Roth IRAs

Roth IRAs are available to investors directly and do not require employer sponsorship. But income limits apply and not everyone qualifies for an account. In 2012, for instance, you could deposit retirement savings into a Roth IRA fund with an income of less than $122,000 if you were single and less than $179,000 if you were married. You make after-tax contributions to your Roth IRA, so you may withdraw the total of your deposits tax-free at any age. But when you tap into the account's earnings before you turn 59 ½ years old, not only do you owe the IRS income tax; you are also subject to a 10 percent early-withdrawal fee. After you meet the age requirement and have kept your Roth IRA for at least five years, you may take a distribution of the earnings tax-free.

10 Percent Penalty Exemption

Some events qualify you for an early distribution from your IRA that is exempt from the 10 percent penalty tax. You may transfer your retirement fund into a rollover IRA without incurring income taxes or early-distribution penalties. You are also allowed to use your IRA savings for college tuition for yourself and your immediate family members without penalty. The U.S. tax code also lets you use up to $10,000 from your IRA to put toward the purchase of a first home. Medical expenses in excess of 7.5 percent of your gross income for the year can be paid with the help of your IRA without penalty. If you find yourself considering an early withdrawal, consult an accountant to find out whether your need for the additional money qualifies you for the 10 percent penalty exemption.