Individual retirement accounts are intended to provide workers with a way to save extra money for retirement. The Internal Revenue Service has regulations about withdrawing money to discourage taxpayers from taking distributions too early or leaving money in tax-free accounts too long. Rules vary slightly between traditional IRAs, whose contributions are tax deductible, and Roth IRAs, whose taxed contributions are exempt when they are withdrawn.
Although there are exceptions for Roth IRAs and periodic IRA distributions, you usually need to be at least 59 1/2 to take IRA withdrawals and not incur a penalty. Additionally, you must start taking withdrawals by age 70 1/2.
Key Ages for Withdrawals
There are two key ages when dealing with IRAs. The first is 59 1/2, the minimum age for taking withdrawals from either a traditional or a Roth IRA, although there are some exceptions for Roths. The second is 70 1/2, when you have to start taking money out of a traditional IRA. A Roth plan is exempt from this withdrawal age requirement. Roth contributions, but not earnings, can be withdrawn at any time after the plan has been established for five years, and Roth funds can be left in place past 70 1/2.
Early Tax Penalty
The IRS will impose a 10 percent penalty on any distributions from a traditional IRA before the 59 1/2 minimum, except for demonstrated hardship withdrawals. Hardships are disability, extreme medical expenses, first-time home purchases up to $10,000 or higher education expenses for yourself or your dependents. Unemployed individuals also can take withdrawals to pay for health insurance.
Periodic IRA Distributions
You can avoid the 59 1/2 penalty if you take traditional IRA distributions as "substantially equal periodic payments." This is a plan to spread your withdrawals over a period of time. There is no minimum age to start these, but you must take distributions for at least five years or until you're 59 1/2 in a series of regular payments that are taxed as ordinary income.
Required Minimum Distributions
You must start taking required minimum withdrawals from a traditional IRA at age 70 1/2, starting no later than April 1 of the year after you turn that age. The minimums are calculated, usually by an IRA trustee, based on the amount in the IRA and life expectancy of the account holder and a beneficiary such as a spouse. There are no exceptions to this rule, even if you're still working.
Roth IRA Rules
You can withdraw contributions from a Roth IRA at any time, but earnings in those accounts are subject to the 59 1/2 limitations on distributions. Once that minimum age is reached and the Roth plan has been established at least five years, all Roth funds can be withdrawn at any time. If a Roth account holder dies, however, the heirs are subject to minimum withdrawal rules.
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