Taking an IRA Distribution

The rules for taking an IRA distribution from an individually owned IRA depend upon the type of account. There are two types of individually owned IRAs – traditional and Roth. The treatment of traditional and Roth IRAs differs significantly. For both types of accounts, distribution is governed by the age of the participant as well as the reason for the distribution.

If you have a traditional IRA, your contributions might be tax deductible but your distribution may be taxable. To avoid tax when you take your money out of your account, you must be at least 59 ½ years old. In addition, you must take some money out of your account before you reach 70 ½ years old or you will be subject to significant penalties. The amount you must have withdrawn before reaching 70 ½ years old is determined by the Required Minimum Distribution calculation. The Required Minimum Distribution is determined by your account balance, your age, the age of your beneficiary and whether your sole beneficiary is also your spouse.

While taking an IRA distribution before age 59 ½ can result in penalties, there are a number of exceptions to this rule. Penalty-free withdrawals can me made from an account before age 59 ½ by your beneficiaries upon your death or if you become disabled. You can also use the money to pay for qualifying medical expenses that exceed 7.5% of your adjusted gross income or to pay for health insurance if you become unemployed. You can use the money to pay for the cost of higher education for yourself or your spouse, or your children and grandchildren. You can also use up to $10,000 penalty-free for a first time purchase of a home. While taking money for these purchases does not incur any penalties, you may be subject to income taxes for the money you have withdrawn. There are a number of other ways to take money from your account without penalty that concern excessive payments and other circumstances, however, these rules can be more difficult to understand and are best utilized with the help of an experienced financial advisor.

Because Roth IRA contributions are not tax deductible, you can withdraw your contributions (not your earnings) without income tax penalties. Earning can be withdrawn without penalty if you have reached age 59 ½, have become disabled or the earnings are being distributed to your beneficiary upon your death. You can also use up to $10,000 for the first time purchase of a home.

Taking an IRA distribution incorrectly can lead to significant penalties. In most cases, it is best to seek the advice of your accountant or financial planner before removing your money.