When considering a regular IRA withdrawal, proceed carefully. Every IRA withdrawal means the sacrifice of important benefits from previous IRA contributions. Remember, each IRA contribution is rewarded with tax benefits including, in many cases, the tax deduction of your contribution. In all cases, the investment growth of your regular IRA is tax-deferred.
(If you have questions about a Roth IRA withdrawal, read this article about Roth IRA withdrawals.)
IRA Withdrawal Rules
With the exception of the recovery of previous non-deductible contributions, all IRA withdrawals are subject to ordinary income tax. An additional 10% early distribution penalty tax is assessed if you have not reached at least age 59 ½ when you take your distribution. Several exceptions to this penalty include:
- You die and the account is paid to your beneficiary
- You become disabled
- You withdraw an amount less than is allowable as a medical expense deduction
- You begin substantially equal periodic payments
- Your withdrawal is related to a qualified domestic relations order (QDRO)
- Your withdrawal is used to pay qualified higher education expenses
- Your withdrawal is used for a qualified “first-home” purchase (up to $10,000)
Additional Early IRA Withdrawal Considerations
In addition to penalties and taxes due upon an early IRA withdrawal, you lose all the potential future investment growth of this retirement plan money. Furthermore, since there are annual limits to the amount you can contribute to a regular IRA, you can’t make up a previous withdrawal later, even when you are on more solid financial footing.
Delaying Your IRA Withdrawal
You may delay receiving distributions from your IRA plan and thereby maximize the benefits of your tax deferred growth until April 1 of the year following the year in which you reach 70 ½. Subsequently, you must withdraw at least your Required Minimum Distribution (RMD) annually.
Your RMD is calculated as your account balance as of the beginning of the year in question divided by your life expectancy as determined by the IRS in its Uniform Life Expectancy table (unless your sole beneficiary is your spouse and your spouse is more than ten years younger than you).
The penalty for not withdrawing your RMD is 50% of the difference between what should have been distributed and what was actually withdrawn.