There are two types of individual retirement arrangements. A traditional IRA allows you to deduct contributions from taxable income in the year they are made, but you must pay taxes on withdrawals as ordinary income. A Roth IRA is built with after-tax contributions, but withdrawals, including earnings, are exempt from income taxes in most cases. However, the Internal Revenue Service has rules for withdrawals from both types.
You can remove funds from either a traditional or a Roth IRA at any time. Distributions from a traditional IRA before age 59 1/2, however, are subject to tax as income plus a 10-percent penalty for early withdrawal. After-tax Roth contributions can be withdrawn without penalty once the IRA has been established for five years, but earnings taken out before 59 1/2 are subject to both taxes and penalty.
An option to avoid withdrawal penalties from a traditional IRA before age 59 1/2 is what the IRS calls "substantially equal periodic payments." These are scheduled withdrawals on a regular basis, starting at any age but continuing for at least five years or until you are 59 1/2. The amount of payments is determined by an IRS formula based on the amount in the IRA and your life expectancy.
Another option for regular withdrawals is an annuity. You can roll an IRA into an annuity, a life insurance product that makes regular payments, without a 10-percent penalty for lump sum distribution of the IRA. An immediate annuity will start regular payments at once, a deferred annuity at some time in the future. While the rollover is not taxed, regular withdrawals from the annuity are considered ordinary income for taxes.
You must start regular withdrawals from a traditional IRA at age 70 1/2. You can take money out monthly, quarterly or at any other interval so long as you withdraw the required minimum yearly. That required minimum is calculated on IRS tables based on funds in the IRA and life expectancy of the IRA holder and any beneficiary. These withdrawals have to be before Dec. 31 of each tax year.
- Morgan Stanley Smith Barney: The IRA Distribution Manual
- Internal Revenue Service: Publication 590 (2011), Individual Retirement Arrangements (IRAs)
- Bankrate.com: Meeting IRA Withdrawal Rules
- Lord Abbett: Traditional IRA Distributions
- Immediate Annuities: Take Advantage of the Tax-Free Rollover Rules to Move Your IRA or 401k into an Annuity