The answer to how much you can take out of your individual retirement arrangement each year is everything, nothing and maybe something. Assuming you are not yet 59 1/2, at which point you could take out whatever you like, or 72 1/2, at which point there are rules for what you have to take from a traditional IRA but no limits on what you can take, there are no provisions for annual withdrawals from an IRA. The reason lies in the name: "retirement arrangement." These plans were never meant to serve as tax-deferred bank accounts.
To be clear, you can always take as much as you like out of your traditional IRA if you want or need it. However, you will pay taxes on the distribution as ordinary income, and when you're younger than 59 1/2, you'll also pay a penalty of 10 percent of the distribution on top of that. Exceptions to the early withdrawal penalty -- but not the tax treatment -- apply to those taken to cover medical expenses that exceed a certain threshold, medical insurance costs if you're unemployed, qualified higher education expenses and first-time home-buyer expenses up to a maximum. You may also avoid the early withdrawal penalty if you are disabled. The penalty never applies if you're an IRA beneficiary.
Since you don't deduct contributions to a Roth IRA as you do to a traditional IRA, you can always withdraw your contributions tax-free and penalty-free. You'll pay taxes and the same 10 percent penalty on the amount of your early withdrawal that comes from investment income, since that wasn't taxed before. Exceptions to the penalty for early withdrawal are the same as for the traditional IRA, but if you've had the plan for at least five years withdrawals for disability or for a qualified purchase of a first home are also tax-free.
Right now you may be scratching your head because your brother-in-law said there's a way to take money out of your IRA every year. Well, in a sense, there is. The Internal Revenue Service allows you to roll over assets from one IRA into another and will not tax you as long as the assets are deposited in the new account within 60 days. So, technically, you could take money out of your IRA, use it and replace it no more often than once every 12 months. However, there's a catch -- two, if you count the huge amount of taxes and penalties you might pay if you miss the deadline by even one day: The institution holding your account will usually withhold 20 percent for taxes when it sends you the check. You won't get this money back until you file your income tax for that year, but in the meantime, you'll have to make it up because you must deposit the entire amount of the distribution or face taxes and penalties.
While you may be lured by the siren song of that IRA you started a couple of years ago when you were feeling "responsible," try to hold out. The tax-deferred gains you'll earn keeping your money in the plan will be well worth it when it comes time for retirement. Even using your distribution to buy a first home should be considered very carefully. You may want to talk with a financial adviser who can help you compare long-term and short-term goals.
Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).