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Individual retirement accounts (IRAs) are one option for investors to save for retirement, and there are various distribution requirements and IRA withdrawal rules that must be followed. Individuals can generally begin to withdraw from an account without the typical 10% penalty after the age of 59 ½. After the age of 70 ½, mandatory IRA distributions, which are calculated by the Internal Revenue Service (IRS) are required.
Age is a determining factor for IRA withdrawal rules. Before age 59 ½, a 10% penalty is applied on any money that is taken out of the account. Several exceptions to this rule are in place, including health care expenses that add up to more than 7.5% of a person’s adjusted gross income or disabilities make a person eligible to make early withdrawals without incurring a penalty. At age 59 ½, IRA withdrawal rules permit individuals to begin taking money out of an IRA account penalty-free. Most of these withdrawals will be taxed as ordinary income at a rate corresponding to the amount withdrawn if the individual is retired, or at the regular income tax rate if the individual is still employed.
After the age of 70 ½, mandatory IRA distributions are required. Individuals can still choose not to take out the amount required by traditional IRA withdrawal rules. This will be subject to a 50% penalty on the amount that should have been withdrawn.
IRA withdrawal rules also allow a withdrawal of up to $10,000 US Dollars (USD) for a first home purchase. As long as buyers have not owned their own home or residence within the past two years, they qualify for the exemption. Couples purchasing a home together can each withdraw $10,000 USD, for a total of $20,000 USD. The money withdrawn from the IRA account must be put towards the house within 120 days to qualify.
Education expenses are also exempt from the 10% penalty as long as the funds are used to support individual, spousal, child, or grandchild education costs. The student must attend a university or college that has been approved by the IRS and provides federal aid programs. Half-time enrollment is required, and the money can be used to cover cost of living in addition to tuition.
Roth IRA distributions work in a similar manner in regards to penalties and age requirements, but money is not generally taxed upon withdrawal. This is because contributions to Roth IRAs occur after an individual has already paid tax on his or her income. Once a Roth IRA has been established for five years, no withdrawals will be taxed. If money is withdrawn before the five-year mark, it will be taxed as ordinary income.