In the world of IRAs, age 59 1/2 is the dividing line between early and qualified withdrawals. Money you withdraw before 59 1/2 is subject to a 10-percent early distribution penalty, although several exceptions exist. Withdrawal rules differ between traditional and Roth IRAs.
Traditional IRA Withdrawals
In a traditional IRA, your contributions are usually tax-deductible and the assets within the IRA grow tax-deferred until they are withdrawn. Under most circumstances, you must include your withdrawals from a traditional IRA in your ordinary taxable income. The one exception involves non-deductible contributions to your traditional IRA, which can arise when you and your spouse are covered, or your spouse alone is covered, by a qualified workplace retirement plan such as a 401(K). Withdrawals of non-deductible contributions are tax-free. You are under no obligation to make any withdrawals from your traditional IRA until your reach age 70 1/2.
Required Minimum Distributions
You must begin taking required minimum distributions (RMDs) from your traditional IRA after reaching 70 1/2. This is also the age when you can no longer contribute to the IRA. The first distribution must occur by April 1 of the following year, known as the required beginning date (RBD). Subsequent withdrawals are required annually by December 31, starting in the year containing the RBD. Your life expectancy on the RBD determines the size of the required distributions. For example, if you had a 20-year life expectancy and a $100,000 IRA balance on the RBD, your annual RMD is $100,000/20, or $5,000. Withdrawing more than the RMD in any year does not affect your obligation to take the full RMD in subsequent years. Failure to take the RMD results in a 50-percent excise tax applied to the undistributed amount. You can't roll over an RMD into another account, but qualified charitable distributions count towards your RMD.
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A Roth IRA provides no tax-deductions on contributions, but can deliver tax-free withdrawals after age 59 1/2. The same 10-percent penalty and similar exceptions apply to withdrawals from a Roth IRA before age 59 1/2. In addition, withdrawals of earnings before this date are taxable, subject to certain exceptions. Withdrawals of Roth contributions are never taxable. You may have to pay taxes and interest on withdrawals of earnings after age 59 1/2 if they occur within five years of the initial contribution to the IRA. Separate five-year waiting periods apply to rollover contributions to a Roth IRA. Roth IRAs do not require you to take minimum distributions. Withdrawals from a Roth IRA do not count toward your RMDs from a traditional IRA.