Retirement accounts with tax benefits are governed by strict rules that can limit your access to funds. Withdrawals from an IRA made before the age of 59 1/2 are considered "early distributions" and may be subject to tax penalties. If you withdraw money from an IRA after age 59 1/2, you don't face an early withdrawal penalty, but you do typically owe income tax on withdrawals.
IRA Withdrawal Basics
IRA withdrawals must be included in taxable income for the year if you did not pay taxes on the money in the year you made the contribution. Traditional IRA contributions are tax deductible unless you are covered by a retirement plan at work and have high income, so you typically owe income tax on traditional IRA withdrawals. Withdrawals from SIMPLE IRAs and SEP IRAs are also subject to income tax upon withdrawal. If you make nondeductible contributions to a traditional IRA, you don't pay income tax on contributions upon withdrawal, but you do pay income tax on withdrawals of investment gains.
Early IRA Distributions
It is worth noting, when you make an early withdrawal from your traditional IRA, before 59 1/2 years of age, this distribution will be considered part of your gross income. You also have an additional 10 percent tax penalty. The IRS does allow for certain exceptions to this 10 percent tax penalty, such as in circumstances of hardship like needing to pay for medical insurance premiums after the loss of a job.
Traditional, SIMPLE and SEP IRAs are subject to "required minimum distributions" when you reach age 70 1/2. RMDs make you take out a percentage of your IRA funds each year, based on your age at the end of the year. The percentage you have to withdraw increases as you age, so your account balance is likely to fall eventually even if your investments continue to grow. If you fail to make a required withdrawal, the amount you don't take out is taxed at 50 percent.
Contributing After Age 70 1/2
You can't contribute to a traditional IRA after required minimum distributions begin. SIMPLE and SEP IRA contributions can continue after age 70 1/2 if you continue working, but you still have to make required minimum distributions each year. You can continue to contribute to a Roth IRA as long as you have earned income.
Roth IRAs differ from other types of IRAs in that you cannot make pretax or tax deductible contributions. Since your contributions come out of after-tax income, you don't owe income tax on withdrawals of contributions, but you also do not pay tax on withdrawals of investment gains as long as you take the money out after age 59 1/2 and at least 5 years after you first open your account. Roth IRAs do not require minimum distributions.
- Internal Revenue Service: SIMPLE IRA Plan FAQs
- Internal Revenue Service: SEP Plan FAQs
- Internal Revenue Service: Retirement Plan and IRA Required Minimum Distributions FAQs
- RothIRA.com: Taking Early Withdrawals from Your Roth IRA
- The Motley Fool: The Roth IRA Part IV -- Early Withdrawals
- Internal Revenue Service: What if I withdraw money from my IRA?
- Internal Revenue Service: Hardships, Early Withdrawals and Loans