If you've meticulously planned your retirement – or if you’re just not in the mood to pay penalties – it's essential to know when you can take a normal distribution, which is often known as a qualified distribution, from your traditional IRA. Qualified distributions are the only time you can tap your IRA balance without penalties. The Internal Revenue Service imposes penalties to discourage investors from using their IRAs for purposes other than funding retirement.
Qualified Retirement Distributions
The rules that govern eligibility for IRA distributions are extremely straightforward for retirees: If you’re at least 59 1/2 years old, you may take money out of your IRA at any time without incurring a penalty. Although at that age you qualify to receive normal distributions from your IRA, you aren’t required to do so until you turn 70 1/2, when you must start taking required minimum distributions. A normal distribution can be made in any amount, although you might have to pay taxes on the distribution when you receive it.
Taxes on Qualified Distributions
If you made deductible contributions to your IRA, you deferred taxes on the earnings you placed into the IRA until you take the distribution. Unless you or your spouse receives coverage from an employer-sponsored plan such as a 401(k) and you earn more than $112,000 – or $68,000 if you’re single – at least a portion of your contributions were deductible. The IRS treats distributions from a traditional IRA as earned income, and the agency taxes them at your marginal rate.
The IRS allows investors to receive penalty-free distributions before they reach retirement age for a handful of reasons – to cover medical bills, education expenses, buying a first home or if they become disabled. However, any other distribution you take before you turn 59 1/2 is treated as an unqualified distribution and is subject to a 10 percent penalty. You’ll also owe your regular income taxes on nonqualified distributions on top of the penalty. So if you’re at the 25 percent tax rate and you take a nonqualified distribution of $10,000, be prepared to fork over $3,500 to the tax man for income taxes and penalties.
Required Minimum Distributions
You can’t allow your IRA to continue to grow indefinitely. If you still have assets in your traditional IRA when you turn 70 1/2, the IRS requires you to move from normal distributions and begin receiving required minimum distributions. To calculate your required minimum distribution, you index your expected life expectancy on actuarial tables that the IRS issues, and you divide your IRA’s balance by the number of years in your estimated lifespan. You must take a distribution of at least this amount. If you don't, or if you don’t take the full amount required, the IRS penalizes you at a rate of 50 percent of the amount you didn’t receive.
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