When you are young, it may seem like you will never receive the money in your individual retirement account. However, there are a few ways to access the money in your IRA even if you are still relatively young. Once you get closer to retirement age, it will be easier to access your money without a penalty. At some point, the IRS will even require you to take money out of your account.
Substantially Equal Periodic Payments
One of the ways to access your traditional IRA funds without facing an IRS penalty is to take "substantially equal periodic payments." If you take out the same approximate percentage of your account every year for the rest of your life, the IRS will waive the 10 percent early withdrawal penalty. However, you have to continue taking equal distributions for at least five years or until you reach age 59 1/2, whichever is later. During this time, you may not contribute to the same IRA, although your distributions will have no effect on other IRA or 401(k) accounts. You do not need to declare a hardship to take this type of IRA withdrawal. The IRS uses three methods for calculating the amount of the required distribution, and they can be complicated to understand. All three methods involve dividing your account balance by a life expectancy or mortality table to determine the minimum payout amount. For some methods, the IRS also requires you to select an appropriate interest rate. The specifics are spelled out in IRS Revenue Ruling 2002-62.
A rollover is a transfer of funds from one retirement plan, such as an IRA, to another. You can roll over your money from your traditional IRA at any time. The benefit of a rollover is that while you are taking money out of your traditional IRA, there are no tax consequences as long as the money ends up in another retirement plan within 60 days. You may even be able to roll your IRA money over into a 401(k) plan if you take a job with an employer that offers one.
Even while young, you are free to take a lump sum withdrawal from your IRA at any time. However, you still face the 10 percent early withdrawal penalty if you are under age 59 1/2. Additionally, lump sum withdrawals can have adverse tax consequences. Any money you withdraw from a traditional IRA is taxable at ordinary income rates, and if you take out your entire IRA in one fell swoop you might push yourself into a higher tax bracket.
Required Minimum Distributions
Once you reach age 70 1/2, the IRS requires you to take money out of your IRA, even if you don't want it yet. You must take your first distribution by April 1 of the year after you turn 70 1/2, and you must continue annual distributions thereafter. Using life expectancy tables you can find in Appendix C of IRS Publication 590, divide your account balance by your life expectancy to calculate that year's required minimum payout.
- IRS: Publication 590, Are Distributions Taxable?
- IRS: Publication 590, Early Distributions
- IRS: Topic 412, Lump Sum Distributions
- IRS: Retirement Plans FAQs Regarding Substantially Equal Periodic Payments
- IRS: Publication 590, Rollovers
- IRS: Publication 590, When Must You Withdraw Assets? (Required Minimum Distributions)
- IRS: Form 4972
- IRS: Publication 590, Appendices
- IRS: Internal Revenue Bulletin No. 2002-42
- IRS: Rollover Chart
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