Withdrawals from your IRA

If you are older than 59 ½ years old and withdraw money from your regular IRA, the distributions are only subject to income tax. If you withdraw funds before you reach age 59 ½ those amounts are subject to both income tax and an early withdrawal penalty equal to 10% of the amount you took out.

Because you fund a Roth with after-tax dollars, you can take your contribution out at any time and for any reason. If you are over 59 ½ years old and have held your Roth for at least 5 years, you can withdraw earnings with no tax or penalty. To escape taxes and the 10% early withdrawal penalty on earnings, you need to hold the Roth IRA for at least 5 years and be over 59 ½ years old. If you’re over 59 ½ but held the account less than 5 years you’ll pay income tax on your earnings but there is no penalty.

There are a number of exceptions to the early withdrawal penalties and those all come with a multitude of conditions. The cost of early withdrawal penalties makes it cost-effective to consult with your tax professional BEFORE you make any early withdrawal. Some common exceptions to the penalty are: the distribution is used for unreimbursed medical expenses, payments of medical insurance when you are unemployed, disability, higher-education expenses, inherited IRA, first time home purchases, substantially equal periodic payments, IRS levy, and being called up to active duty for reservists.

You may qualify for more than one exception, there are conditions, and there are other arrangements that may affect your tax calculations. Contact your licensed tax professional for a consultation because unlicensed tax preparers are prohibited from advising clients in matters of tax planning, and for good reason.

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