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When You Can and Must Take Money Out of Your IRA

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You are certainly able to take money out of your IRA at any time, but oftentimes not without penalty. Let’s review one of the better-known rules about IRA distributions.

If you take withdrawals before age 59 ½, you will have a 10% IRS penalty to cover. This charge could be in addition to any tax liability you could owe from a Traditional IRA withdrawal. For Roth IRA account holders, a distribution from a Roth IRA is usually tax-free, but even if you’re past the magical age of 59 ½, you may owe income taxes if you’ve had the Roth for less than five years.

Of course, there are several exceptions to this rule, including withdrawals made to pay for first-time home purchases, qualified education expenses and un-reimbursed medical expenses. It’s important you consult a tax and/or financial advisor before deciding to take a distribution from your retirement account.

There are also times when you are absolutely required to take a distribution from your IRA. As above, let’s go over one of the better-known rules.

If you’re one of the privileged retirees who can live off employer pension or you simply choose to live off Social Security alone, you can only go so long before Uncle Sam starts penalizing you. If you don’t withdraw at least the required minimum distribution (RMD) beginning at age 70 ½, you will have a 50% penalty to cover—that is, 50% of what you should have withdrawn. For Roth IRA account holders, you have no RMD provision and, therefore, can leave Roth IRA funds in our account as long as you wish.

Also, since IRAs aren’t designed to go on forever, a separate set of rules applies to distributions after death. Any non-spouse beneficiary can extend the withdrawals over his or her life expectancy and RMD calculations, or, in some instances, he or she can take a lump-sum payment or distributions over a five-year period. Your surviving spouse has both of those options plus a third: roll over your IRA into his or her own IRA.

You don’t want to find yourself in a situation where your retirement nest egg is dwindling because of distribution penalties.

Keep in mind that this is by no means a comprehensive rundown of IRA distribution rules, nor is it intended to replace any advice provided by a tax, legal or financial advisor. We advise a thorough consultation with one or more such professionals before taking action on a distribution.

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