The Internal Revenue Service (IRS) creates the laws that govern Individual Retirement Arrangements (IRAs). The laws are routinely revised, though not at pre-determined intervals. As IRAs are meant to encourage retirement saving, most of the IRS withdrawal rules are intended to discourage pre-retirement distributions from the accounts.
Traditional IRA Taxed as Income
Every withdrawal from a traditional IRA is subject to ordinary income tax. How much you'll pay depends on your marginal tax rate. Whether the withdrawal is voluntary or mandatory, and whether it is before or after retirement age, it will be taxed.
Age 59 1/2 Rule
With rare exceptions, if you take money from a traditional IRA before you reach the age of 59 1/2, you will incur a 10 percent penalty. You must pay this penalty in addition to the ordinary income tax you pay on the distribution. As of tax year 2012, this could mean a tax liability of up to 45 percent on an early withdrawal.
Age 70 1/2 Rule
Once you reach the age of 70 1/2, you must start to take yearly distributions from your traditional IRA. These withdrawals are termed required minimum distributions (RMDs). You calculate the RMD by dividing your IRA's year-end balance by a figure on an IRS life expectancy table that corresponds to your age. If you somehow fail to withdraw the RMD in any given year, the IRS will levy a 50 percent penalty on the distribution amount. You can also petition the IRS to waive the penalty by writing a letter of explanation.
Roth IRA Rules
You are free to remove Roth IRA principal at any time for any reason without tax or penalty. Tax and penalty-free earnings distributions must meet a two-pronged test. You have to have owned a Roth for at least five years, and you must have reached age 59 1/2. If you have owned an account for five years but have not reached 59 1/2, you pay just the 10 percent penalty. If your account is not yet five years old, but you are at least 59 1/2, you pay only income tax on the earnings withdrawal.
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