An Explanation of IRA Distribution

The Internal Revenue Service refers to withdrawals from traditional and Roth IRAs as distributions. You can take money out of an IRA at any time. However, because you get tax breaks for putting money into IRAs, the IRS has strict rules about distributions. If you want to get the tax breaks and avoid penalties, you have to follow the IRA distribution rules.

Traditional IRA Distribution

The money in a traditional IRA is not taxed as long as it stays in the account. When you take a distribution from a traditional IRA, you pay ordinary income taxes on the money you withdraw. The taxes are due in the year you make the withdrawal. If you withdraw money from a traditional IRA before you reach the age of 59 1/2, you normally pay an extra 10 percent penalty tax. The IRS does waive the penalty under some conditions.

Roth IRA Distribution

You don’t get to deduct Roth IRA contributions as you do those made to traditional IRAs. However, distributions that meet IRS requirements are “qualified,” meaning you pay no taxes on the money you withdraw. You can take out the money you contribute at any time tax free. Investment earnings are qualified only if two conditions are satisfied. The Roth IRA must be at least five years old, counting from January 1 of the year the account was opened. In addition, you must be 59 1/2 years old, become permanently disabled or use the money, up to $10,000, to fix up or buy a first home. You can also take out money tax free from a Roth IRA you inherit as long as the account meets the five-year rule. All other distributions of earnings are unqualified and you have to pay income taxes on the money and may have to pay a penalty tax as well.

Required Minimum Distribution

The IRS says you must start making required minimum distributions from traditional IRAs the year you turn 70 1/2. The amount of the RMD is figured by dividing the account balance by your remaining life expectancy as determined by IRS rules. You may withdraw more if you wish, but if you don’t withdraw the RMD amount, the IRS hits you with a 50 percent penalty tax on top of ordinary income taxes. Roth IRAs aren’t subject to the RMD rule, so you can leave money in a Roth as long as you like.

Early Withdrawal Exceptions

Early distributions from IRAs, except for qualified Roth distributions, are subject to a 10 percent penalty tax unless the distribution is eligible for a waiver. The IRS waives the penalty tax if the money is used to pay for a first home, qualified medical or higher education expenses, or to pay health coverage premiums while you're unemployed. You don’t have to pay the penalty when the IRA is inherited, you become disabled or the money is used for an IRS levy. Qualified annuity payments and qualified reservist distributions are also exempt from the penalty tax.