Tax laws set certain limits on when you can withdraw from your traditional individual retirement account in order to maintain the intent of building your retirement account through tax-deferred means. Requirements have been set up for withdrawing from your IRA as you reach retirement age to ensure your financial security at that time. Exceptions to those requirements may aid you financially during certain times, but early withdrawals, even without penalties, are meant for availability as a last resort.
When to Begin
The best time to withdraw from your traditional IRA is during the period when you plan to retire. You can take money out of your IRA without penalty beginning at age 59 1/2, but doing so largely depends on your financial condition, and there is no requirement that you start withdrawing money at that age. Withdrawing only the amount you need for necessities if you are on a tight budget could help you out during difficult times. Leaving as much in your account as possible or not withdrawing until later on keeps your tax-free nest egg growing for a stronger retirement fund.
You may choose to wait until you reach age 70 1/2, when tax laws require you to start making minimum withdrawals. If you don't withdraw money by this point, you face a 50 percent penalty on the amount short of the minimum. You can take out more, but you will be taxed on any income withdrawn. The closer you are to the minimum, the lower your taxes. The minimum amount is based on your account balance divided by life expectancy figures for you or you and your beneficiary. The Internal Revenue Service provides tables on these figures.
If you need emergency cash, exceptions to the withdrawal rules include taking out a loan on your IRA or annuitizing your account. This will affect the growth of your IRA and also limit your capabilities of adding more money to your tax-deferred retirement fund beyond the annual contributions. If an emergency calls for it, you can take out a 60-day loan from your IRA, but you must pay the loan back within the 60 days or face penalties and taxation on the amount. The IRS allows these loans once a year. Annuitizing your account means you can withdraw money for five years or until your reach retirement age. The IRS determines the percentage of the amount each year based on your life expectancy. You will have to pay taxes on the amount but not penalties. Check with certified tax or financial planners for details on requirements for these withdrawals. Better yet, look to other methods for emergency cash, such as borrowing from a 401(k) plan or getting money from other accounts to keep your IRA growing for retirement. If you have a Roth IRA, you can withdraw your contributions to the account at any time tax-free.
Medical and health needs may present situations when withdrawing money makes sense. You can take money from your traditional IRA penalty-free for health insurance if you lost your job and have been collecting unemployment benefits for 12 months. You may withdraw money for medical expenses that exceed 7.5 percent of your adjusted gross income. The Disability Act allows you to withdraw money from your IRA if you are disabled and cannot work, provided a physician has verified it. Health needs are obviously a very important part of your life, but try to find other methods of payment before disrupting your retirement savings, especially since you are generating tax-free income with an IRA.
Withdrawals for Family
You can withdraw IRA money for education for your family to cover expenses, including tuition, books, supplies and rooming costs. The IRS allows these education costs only for approved institutions. First-time home buyers can withdraw as much as $10,000 without penalty, or double that amount if they are married. These penalty-free IRA withdrawals might sound tempting, but it depends on your financial situation and goals, as well as the importance you place on growing your retirement fund. As with other exceptions, finding alternatives for financial help is preferable to interfering with retirement investments.
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