An IRA withdrawal is when you withdraw money from your individual retirement account (IRA). You can make IRA withdrawals at any time and for any reason. However, as with 401(k) withdrawals, you may be penalized if you take a distribution before age 59½.
IRA withdrawal rules differ slightly depending on whether you have a traditional IRA (funded with pre-tax money) or a Roth IRA (funded with after-tax money). In this article, we will discuss how IRA withdrawals work. You’ll learn the rules, the differences between taking distributions from a 401(k) and an IRA, whether IRA loans are allowed, and more.
More information: What is an IRA and how does it work??
Contributions to a traditional IRA are typically tax deductible, but you owe ordinary income taxes on any withdrawals. If you withdraw money from the account before age 59½, you will typically pay income taxes and a 10% penalty on the amount you withdraw.
Over time, you will need to take mandatory withdrawals, called required minimum distributions (RMDs), from your traditional IRA. The RMD age increased to 73 (from 72) under the Safe Act 2.0, a law former President Joe Biden signed into law in late 2022. The law will raise the RMD age to 75 in 2033.
More information: Traditional IRA vs. Roth IRA: How to Choose the Right One
Roth IRAs are always funded with money that you have paid taxes on. Withdrawals are tax-free and penalty-free as long as you are at least 59½ years old and the account is at least 5 years old.
However, Roth IRAs give you more flexibility than a traditional IRA. If you limit your withdrawals to the money you have contributed to the account, you won’t have to pay taxes or penalties on the distribution. But if your withdrawal includes any of the earnings in the account, you will have to pay taxes and penalties on the earnings portion of the withdrawal.
The IRS treats the money you withdraw from a Roth IRA as if it left the account in this order:
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Contributions: You can withdraw up to the amount you contributed tax-free and penalty-free, no matter how old you are or when you opened your Roth IRA.
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Rollover and converted amounts: You can roll over or convert a traditional IRA to a Roth IRA, as long as you pay taxes on the amount you convert. Rollover and converted Roth IRA contributions come out after regular contributions on a first-come, first-served basis, meaning you withdraw the oldest converted contributions. The timing of contributions is important because you will have to pay a penalty if you withdraw the converted funds if you don’t keep the money in your Roth IRA for at least five years.
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Earnings: The money they have earned from their contributions comes out ultimately when you make a Roth IRA withdrawal.
Unlike traditional IRAs, Roth IRAs have no required withdrawals while the original account holder is still alive. That makes them a popular tool for transferring wealth to beneficiaries. But if you inherit an IRA with a Roth tax structure, you will eventually be required to take distributions. Because the rules are complex, consult with a tax professional in this situation.
More information: These are the traditional IRA and Roth IRA limits
There are several situations in which you can avoid the 10% early withdrawal penalty that often applies to IRA distributions before age 59½, including:
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You are withdrawing up to $5,000 for expenses related to the birth or adoption of a child
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You become totally and permanently disabled
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You are withdrawing up to $22,000 after suffering financial losses due to a federally declared disaster.
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You are a survivor of domestic violence and are withdrawing up to $10,000 or 50% of your IRA account balance.
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You are withdrawing up to $1,000 for a personal emergency expense
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You are a first-time home buyer and withdraw up to $10,000
See the full IRS list here.
Note that the above scenarios may help you avoid the 10% early withdrawal penalty, but you may still owe income taxes on the IRA distribution. To evaluate the impact of an IRA withdrawal, consider consulting with a financial advisor.
One big difference between a 401(k) and an IRA is that many 401(k) plans allow you to borrow money from your account and pay it back with interest, but IRA loans are prohibited. Under IRS rules, if you borrow money from an IRA, the account is no longer considered an IRA. The account loses its tax-advantaged status and the entire balance will be included in your taxable income for the year.
More information: What is a 401(k)? A guide to the rules and how it works..
However, the IRS allows what is known as a 60-day IRA rollover. If you withdraw money from your IRA and then deposit it into another IRA or retirement account, you can avoid the typical taxes and penalties that would apply to a distribution. This is known as a non-taxable rollover and you are only allowed one in a 12-month period.
In that sense, a 60-day rollover may be similar to an IRA loan, but if you go this route, make sure you can redeposit the funds within the required time frame. Otherwise, you could be stuck with a huge tax bill.
Read more: Retirement Planning: A Step-by-Step Guide
Yes, you can withdraw money from a Roth IRA before you turn 59½, and you can even avoid income taxes and a 10% early withdrawal penalty if you limit your withdrawal to the amount you’ve contributed. However, if your withdrawal exceeds your contributions, you will have to pay taxes and penalties on the portion of the earnings if you are under age 59½. Once you are 59½ and have had your Roth IRA for at least five years, withdrawals are tax-free and penalty-free.
No, IRS rules prohibit borrowing from an IRA. If you take out an IRA loan, the account will no longer be an IRA and the full amount will be included in your taxable income. However, you can take money out of an IRA and then redeposit it into another IRA within 60 days without it counting as a distribution.
You will owe income taxes on withdrawals from a traditional IRA because the account is funded on a pre-tax basis. You can avoid taxes on a Roth IRA withdrawal by limiting the distribution to the amount you have contributed or by waiting until you are 59½ and have held the account for at least five years. You can avoid the additional 10% tax penalty for early withdrawals from a traditional or Roth IRA if you qualify for an exception, have significant unreimbursed medical expenses, or have experienced financial loss due to a disaster, for example.
Tim Manni Edited this article.