Senior citizens, generally defined as those aged 60 and over, have an advantage over all others when it comes to IRA withdrawals. They do not need to concern themselves with the early withdrawal period, which ends at age 59 1/2, and its attendant penalty. In addition, senior Roth IRA owners need never worry about paying a penalty on an earnings withdrawal. With some types of distributions, however, income taxes still come into play.
Traditional IRA - Income Tax
When you contribute to a traditional IRA, you deduct the contribution from your adjusted gross income at tax-filing time. Your IRA investments grow tax-deferred. When you withdraw traditional IRA funds, then -- at whatever age -- the Internal Revenue Service finally gets its cut. Every distribution from a traditional IRA is subject to income tax, Whether you begin taking withdrawals of your own volition at age 60 or wait until age 70 1/2 when the IRS mandates yearly withdrawals, you will have to pay income tax on the amount. There is no such thing as a tax-free traditional IRA distribution.
Required Minimum Distribution - Penalty
When you turn 70 1/2, the IRS demands that you start taking money out of your traditional IRA every year. The yearly sum is called a required minimum distribution and is calculated by dividing your end-of-year IRA balance by a life-expectancy figure from an IRS table. If you do not withdraw at least the RMD by December 31 of a given year, the IRS will impose a 50 percent penalty on the amount you failed to take out. For example, if your RMD is $5,500 and you withdraw just $2,500, you will have to pay a penalty of 1,500, that is, $3,000 times 0.50.
Roth Rollover Five-Year Rule
Anytime you effect a rollover from a pretax retirement account to your Roth, you pay taxes on the rollover amount. Over time, the rollover money accrues earnings. You have to wait five years from the date the rollover funds were added to your Roth to withdraw those earnings free of tax and penalty. Even after age 59 1/2, if you do not wait at least five years from the date of the rollover, you will owe the IRS income tax on the Roth rollover earnings you withdraw.
Roth Ordering Rules
In matters of Roth IRA withdrawals, the IRS sees all Roth accounts as one. In addition, the IRS sets an order relative to withdrawals. It counts regular contributions first, then rollover contributions, then earnings. So, say you have two Roth accounts, and your contributions to them total $20,000. Into one of them you roll $25,000 from a traditional IRA. In the meantime, earnings of $250 have accrued. When you take a Roth distribution -- from either account -- the first $20,000 is considered as principal, the next $25,000 as rollover money, and the final $250 as earnings.