The Internal Revenue Service has created extensive regulations for individual retirement accounts. The size of your IRA contributions, the time you can withdraw from an IRA without penalty, and whether or not you can take a tax deduction on your contributions are all limited by IRS rules. The maximum withdrawal you can take from an IRA account may not have a specific limit, but it could have significant consequences.
An IRA is an individual retirement account, not a corporate retirement account. Unlike many employer-based plans, such as profit-sharing plans or 401(k) plans, you have complete control over the money in your IRA. The IRS uses taxes and penalties to encourage investors to keep money in their IRAs until retirement. However, you have the freedom to take money out of your IRA at any time, even the entire balance. You'll have to complete an IRA distribution form so that your financial services firm can track and report your withdrawal, but they can't prevent you from accessing your funds.
In nearly all cases, you'll end up paying taxes on your IRA withdrawal, particularly from a traditional IRA. If you've had a Roth IRA for at least five years and you're over the age of 59 1/2, you can take a tax-free distribution from your Roth. If those criteria don't apply to you, you can take out your original contributions -- not earnings -- free of tax and penalties at any time. However, most traditional IRA withdrawals are fully taxable at ordinary income rates. If you take a large withdrawal, you might kick yourself up to a higher tax bracket, with the result being you'll end up paying higher taxes than if you took out a smaller amount or spread the withdrawal out over several years.
If you take a distribution from any type of IRA before age 59 1/2, you'll face an additional 10 percent penalty for a premature withdrawal, unless you meet one of the few IRS exceptions. If you're intent on taking a maximum distribution from your IRA, the 10 percent penalty could end up costing you dearly, particularly if you're in a high tax bracket. For example, in 2012 the highest federal income tax bracket was 35 percent. If you took out a large early IRA withdrawal, you'd lose at least 45 percent of it to federal taxes and penalties. If you live in a state with its own income tax, your total bill could easily exceed half of your distribution.
If you have second thoughts about the financial prudence of taking a maximum IRA withdrawal, you may be able to take advantage of IRA regulations to reverse your choice. The IRS allows you to roll over your money from one retirement plan to another once per year, as long as you complete the rollover within 60 days. If you return your maximum IRA withdrawal to your account -- or to any other qualified retirement plan -- within 60 days, the IRS will consider your distribution to be a rollover, thus avoiding any taxes or penalties.
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