Withdrawal Rules for Traditional IRA

Traditional individual retirement accounts allow you to make tax-deductible contributions that grow on a tax-deferred basis. You must include withdrawals from the IRA in your ordinary taxable income. The exception occurs regarding non-deductible contributions, which are tax-free when distributed.

Non-Deductible Contributions

You can contribute up to $5,500 of your income -- $6,500 if age 50 or older -- to your traditional IRA each year, and then deduct the contribution from your taxable income. However, if you or your spouse is also covered by a qualified workplace retirement plan such as a 401K, your contribution deduction may be limited, as shown in Table 1. When you withdraw money from your IRA, you must prorate the taxable and non-taxable amounts based on the percentage of the IRA balance stemming from non-deductible contributions, if any. For example, if 10 percent of your IRA balance is due to non-deductible contributions and you withdraw $20,000, you add 90 percent -- 100 percent minus 10 percent -- or $18,000, to you taxable income. IRA withdrawals are taxed at your ordinary income tax rate.

Figure 1 - Deduction Limits
Image Credit: EB

Withdrawals Before Age 59 1/2

You may have to pay a 10 percent penalty when you withdraw money from a traditional IRA before age 59 1/2. However, the IRS waives all or part of the penalty for certain exceptions, including:

  • You become disabled or die
  • You have qualified education expenses
  • You have unreimbursed medical bills in excess of 10 percent of your gross income
  • You are unemployed and pay for health care insurance
  • You are under court order to pay alimony or child support
  • You are building, buying or rebuilding your first home, up to $10,000
  • The IRS levies your IRA to pay for taxes you owe
  • You are a reservist called up for at least 180 days of active duty service

Required Minimum Distributions

You must start taking annual required minimum distributions, or RMDs, from your traditional IRA by April 1 in the year following your attainment of age 70 1/2, known as the required beginning date, or RBD. All subsequent RMDs must be made by Dec. 31, starting in the year containing the RBD. The amount of the RMD is equal to the IRA balance on the RBD divided by the number of years the IRS expects you live. Failure to take the RMD results in a 50 percent excise tax on the undistributed amount.