The Internal Revenue Service regulates all individual retirement accounts and mandates which distributions and withdrawals are qualified under the tax exempt status. You can make withdrawals, but if they don't meet the IRS standards you'll take a 10 percent penalty with you, along with state and federal income taxes. In some cases, Roth IRAs differ from traditional IRA in what is and is not allowed.
Mandatory Distribution Age
If you have a traditional IRA, it'll be some time before the government demands you take withdrawals. The rules say you have to start by the time you turn 70 1/2, but calculating this exact date is not as simple as it may seem. You could take it the year you reach that age, or the next year as long as it's gone by April 1. Waiting until the following year doubles the tax liabilities since you'll need to make a double withdrawal. There's no mandatory distribution rule if you own a Roth IRA.
Required Minimum Distributions
With the mandatory withdrawal age comes a mandatory withdrawal amount. As with most things regarding the government, the calculations for the minimum required distributions tend to be somewhat complex. You must consider the total balance in the traditional IRA account for the previous year, your life expectancy, and the life expectancy of your beneficiary. The IRS publishes tables each year to assist with these calculations. If there's no beneficiary, a minimum 10 year rule applies in which the IRS automatically assumes the beneficiary is 10 years your junior.
Under certain conditions, you can withdraw cash before you're 59 1/2. If you're a first time home buyer, you're OK. It's fine too if you're taking it for qualified educational expenses, or to pay for health insurance if you're unemployed. If it's a Roth IRA, no contributions can be distributed unless they've been in the account at least five years. At that point, first time home buyers can take the early withdrawal, as can people whose finances have been impacted by death or disability.
If you become the beneficiary of an IRA, either through the death of a parent or spouse, the IRS will insist you take the distributions in the year after the owner dies. Distributions are based on the life expectancy of the beneficiary. For example, if your mom passed away in 2012, the IRS will demand you make a withdrawal by the end of 2013. The withdrawal amount is the value of the IRA divided by your life expectancy.
- How Does a Stretch IRA Work?
- Are Roth IRA Contributions Taxable After 59 1/2?
- Tax Consequences for the Beneficiary of a Decedent's IRA
- Required Withdrawals from IRA Accounts
- How Much Tax Do You Pay on an IRA on Retirement?
- Do You Have to Pay Federal Tax on an IRA Disbursement From a Deceased Relative?