The traditional IRA is the original incarnation of the tax-advantaged retirement savings vehicle for working Americans. Because the IRA offers such advantages, the Internal Revenue Service put rules in place to discourage account holders from using the funds before retirement. Because contributions are not taxed, the IRS also created regulations to ensure it would collect revenue on the funds at withdrawal.
Withdrawals Taxed as Income
Every traditional IRA distribution, at whatever age or for whatever reason, is subject to ordinary income tax paid at your marginal tax rate for the year. Withdrawals are included in income when you file your return. If your other income places you at or near the upper limit of a tax bracket, your IRA withdrawal may push you into the next bracket.
Age 59 1/2 Rule
You must have attained an age of at least 59 1/2 to make an IRA withdrawal. If you take money from the account sooner, you will be assessed a 10 percent penalty on the distribution. This penalty is added to the ordinary income tax you must always pay. As of 2012, an early distribution could cost you up to 45 percent of the withdrawal amount if you fall into the 35 percent tax bracket.
Age 70 1/2 Rule
You must start taking required minimum distributions when you reach age 70 1/2. The RMD is calculated by dividing the IRA's end-of-year balance by the figure on an IRS life expectancy table that corresponds to your age. Each year, your age goes up and the life-expectancy figure drops, so you have to make the calculation anew.
Early Withdrawal Penalty Exceptions
You can take up to $10,000 penalty-free in your lifetime to fund the purchase or construction of a new home for yourself, your spouse, your children or your parents. The money must be used for the purchase within 60 days of its receipt. You can also use IRA money without fear of penalty to pay for higher education costs for yourself or your family. Other exceptions include paying medical expenses that exceed 7.5 percent of your adjusted gross income -- as of tax year 2012 -- and paying health insurance premiums while you are unemployed.
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