Withdrawing Funds From Your IRA

Individual Retirement Arrangements (IRAs) provide tax efficient savings and incentives for setting aside retirement money. Because the IRS allows individuals to take a tax deduction, up to certain limitations, for the amount contributed to an IRA, they also place strict requirements on when and how money can be taken out of the account. While it’s nice to have a tax friendly savings vehicle, it is important to understand the rules guiding withdrawals from these accounts.

These rules are fairly straightforward in some cases and convoluted in other scenarios. Since different rules apply for different circumstances, understanding these rules will help in avoiding unnecessary penalties or taxes.

The Basics

Since IRAs are meant to be an incentive for retirement savings, the IRS imposes a 10% penalty on any funds withdrawn prior to the account owner reaching age 59 ½. And because IRAs are funded with pre-tax dollars and the investments in the account grow tax-deferred, we must pay ordinary income taxes on any amounts withdrawn from the account. Once the money is placed into a Traditional IRA, there are only certain circumstances under which the funds can be withdrawn before age 59 ½ without penalties.

Exceptions to the Early Withdrawal Penalty

While the IRS restricts early withdrawals to prevent misuse of IRAs and other retirement accounts, they also recognize that individuals may face certain hardships under which access to IRA funds may be particularly important. For this reason, there are a number of specific circumstances that allow for penalty free withdrawals prior to age 59 ½. The early withdrawal penalty may be avoided when funds are withdrawn to pay for certain expenses, including:The 10% early withdrawal penalty may also be avoided when the account owner is totally and permanently disabled or when distributions are taken in substantially equal periodic payments over the life of the account owner. It is important to note that while the early withdrawal penalty may be avoided under these circumstances, the income taxes owed on the withdrawal amount can never be avoided.

The 60-Day Rule

In addition to the early withdrawal penalty exceptions listed above, there is another way money can be taken from an IRA without penalty, but only temporarily. The IRS allows for temporary withdrawals from IRAs that are penalty free as long as the funds are replaced within 60 days. While taking money from a retirement account prematurely should always be avoided when possible, this option allows IRA owners to access short term funds if the money can be repaid within 60 days. The 60 day withdrawal may only be done one time per year. If more than one withdrawal is made within a one year period, the second withdrawal will be subject to the early withdrawal penalty even if the funds are repaid within 60 days.

Withdrawing money from an IRA during retirement is not a complicated procedure. Withdrawing money prior to age 59 ½ is clearly a little more vague. Regardless, early withdrawals from any retirement account should only be considered as a last resort in times of financial hardship.
By InvestorGuide Staff

Copyrighted 2020. Content published with author's permission.

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