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Tags: finance, ira, ira withdrawal rules and exceptions
 If you have a traditional Individual Retirement Account, understanding the IRA withdrawal rules and exceptions can help you decide if taking out your money early or not is a good option for you. The IRA distribution rules state that once you reach the age of 59½, you can begin withdrawing from your account for any reason without incurring any tax penalty.
However, know that the earnings that you take out will still be subject to income taxation. In addition there is also an IRA required minimum distribution requirement which states that once you reach the age of 70½ you need to take money out of your account. This means that you start receiving the minimum distributions from your account by April 1st of the year following the year you reach age 70½.
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This IRA withdrawal rule is to make sure that your retirement money that’s sitting in your account is regularly taken out and taxes paid on it over your remaining expected lifespan. This is congress’ sneaky way of forcing you to hand over to the IRS its share of your retirement money sooner rather than later.
Also if you don’t take the full minimum IRA withdrawal amount each year, you'll be assessed a 50% penalty for the shortfall. And if you don’t take any at all for this year, you need to take double next year and be taxed on the bigger amount. Either way you still need to pay the piper.
At least for the 2009 tax year, you can skip the required minimum distribution because the December 2008, Worker, Retiree, and Employer Recovery Act of 2008 was signed into law, and provided a waiver of the 2009 mandatory withdrawal requirement. Let’s now talk about what happens if you took you money out early.
If you are thinking about an early IRA withdrawal you need to know that there is an IRA withdrawal penalty if you take your money out before you reach aged 59½--a 10% federal penalty tax. At the same time, your own state may also apply its own penalty tax, so you can get penalized twice.
But every dark cloud has a silver lining and the IRS was kind enough to provide some exceptions so you don’t get penalized. If you are unable to do any substantial gainful activity due to permanent physical or mental disability you will not have to pay the 10% penalty. The same is true if you paid for your own medical expenses and they total more than 7.5% of your adjusted gross income for that year.
Another IRA withdrawal exceptions is if, during your unemployment, you paid for yourself, your spouse, and your dependent’s medical insurance. The only caveat is that you need to have been unemployed for at least 12 weeks. If you paid the expenses for certain higher education during the year for youself, your spouse, children or grandchildren, part (or all) of any money you took out early may not be subject to the 10% tax penalty but you may still need to pay income tax on them.
If you’re a first time home buyer, you are your own IRA withdrawal penalty exception. You can actually take out up to $10,000 as a one time exception towards the purchase of your first home even if it’s really not your first. The only rule is that you or your spouse did not own a primary home for two years prior to buying one.
You will also be not penalized if you rolled the money over to another qualified retirement plan within in a timely manner. And of course the ultimate exception—your death. Your estate will not be penalized at all. However, in order for the exceptions to kick in there’s a five year waiting period from the time you opened your account before you can do an IRA withdrawal.
About the author
The author of this article Rick Goldfeller is a successful underground Financial Analyst who has been advising and coaching individuals for many years. Rick recently published a book on how to manage your money and attract Wealth and Financial Freedom. More info on his Finance Planning course is available HERE.
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