An individual retirement account is structured to help you save money for when you get older and retire. Once you are elderly, you can avoid some of the penalties associated with taking money out of an IRA prematurely. However, you may not be able to avoid taxes, even if you live in Texas. You may still face penalties if you don't take out enough money to satisfy your IRS-mandated minimum distributions.
Federal Taxes
For traditional IRAs, all distributions are federally taxable, even if you are elderly. Traditional IRAs are funded with pre-tax contributions, and earnings are tax-deferred. Since none of the money in your IRA has been taxed, it all becomes taxable upon withdrawal. You'll have to include the amount of your IRA distributions in your ordinary income, and it will be taxed at your regular income tax rate. Roth IRAs are an exception, as you can take tax-free distributions from a Roth if your withdrawals are after age 59 1/2 and if you've had the account for at least five years.
State Taxes
Texas is one of the few states in the union that doesn't have a state income tax. Since traditional IRA distributions are considered ordinary income, they'd face additional taxes in most states. However, if you're a Texas resident, you need not worry about paying additional state income taxes on your IRA withdrawals.
Insufficient Distributions
If you're an elderly IRA owner, the IRS requires you to take out a certain percentage of your IRA every year. After you turn age 59 1/2, the IRS mandates minimum required distributions, the amount of which is a function of your age and your account value. If you don't take out enough money to satisfy the IRA requirement, you'll be hit with a 50 percent penalty for an "insufficient distribution."
Premature Withdrawals
If you and the IRS have different interpretations of the term "elderly," you may face an additional penalty on your IRA withdrawals. Even if you're retired, if you take money out of your IRA before you turn 59 1/2 you'll generally be charged a 10 percent "early withdrawal" penalty. If your distributions are for limited qualified reasons, such as disability or certain educational or medical expenses, the IRS may waive the penalty. However, for virtually all other distributions before age 59 1/2, you'll have to pay the penalty.
