How to Take Disbursements from IRA Accounts

IRA money is meant for retirement, which means that ideally, it should stay put until you reach your golden years. However, you may decide sometime before retirement age to dip into your IRA funds, for example, to shore up finances while unemployed, replace a family vehicle or retire lingering consumer debt. But proceed carefully: Because IRAs offer tax breaks, the IRS has levied penalty and excise demands on many withdrawals. There are some exceptions, though. Learning the ins and outs of IRA disbursements before you act is key to preserving your nest egg.

Reach Age 59 1/2

To withdraw, penalty-free, any funds from a traditional IRA and earnings from a Roth, you must have reached the age of 59 1/2. If you take disbursements sooner, you will in most cases be subject to an early withdrawal penalty of 10 percent. In the case of a traditional IRA, you have to pay ordinary income tax at your usual rate no matter when you make the withdrawal. On the upside, Roth owners are entitled to take out Roth principal tax-free at any time. After age 59 1/2, Roth earnings can also be withdrawn free of tax and penalty.

Take Required Minimum Distributions

Even if you do not begin taking disbursements from a traditional IRA at age 59 1/2, the IRS requires that you start taking disbursements, called required minimum distributions (RMDs), at age 70 1/2. The RMD is typically calculated by the IRA trustee. It is determined by dividing the IRA balance as of December 31 by a figure on an IRS life-expectancy table. Failure to withdraw at least the RMD subjects the IRA owner to an excise tax equal to 50 percent of the RMD amount.

Qualify for an Exception

You can take traditional IRA disbursements penalty-free before you reach 59 1/2 if you use the money to buy or build a new home; pay for higher education; or cover medical costs that exceed 7.5 percent of your adjusted gross income. You can also avoid the penalty if you become totally and permanently disabled. To meet the IRS standard for total and permanent disability, you must be unable to work. Your doctor must also state that your condition will last for at least a year. These exceptions also apply to withdrawing earnings penalty-free from a Roth.

Wait Five Years After a Rollover

If you roll retirement funds into a Roth IRA, you have to wait five years before withdrawing the funds penalty-free. The five-year clock begins on January 1 of the rollover year. For example, on October 1, 2012, you roll $2,000 from a retirement account to a Roth. You cannot take disbursements from the rollover until January 1, 2017. If you do, the IRS will levy a 10-percent penalty on the withdrawal amount.