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Retirement

Traditional IRA Withdrawal Rules & Penalties Explained

With a traditional IRA, your contributions are deducted from your taxable income, and investments in your account get tax-deferred until retirement. The IRS doesn't let you take money out of a traditional IRA without penalties until you reach the age of 59½. You're also required to take minimum distributions from your account once you reach the age of 72.

Here's everything you need to know about withdrawing money out of a traditional IRA.

Withdrawals made before the age of 59½

To take qualified distributions from your account, you must be at least 59½ years of age. Any withdrawals made before you reach the age of 59½ are hit with an early distribution penalty of 10% plus income taxes. For example, if you withdraw $10,000 from your traditional IRA before you reach the eligible withdrawal age, you'll have to hand over $1,000 of that to the IRS in penalties, plus pay income taxes on the $10,000 withdrawn.

How to avoid the 10% penalty on early withdrawals

There are certain instances where early distributions can be taken without the 10% penalty.

  • Death or disability
  • Unreimbursed medical bills
  • Health insurance premiums (if you were unemployed for at least 12 weeks).
  • If you owe the IRS
  • Higher education expenses for yourself, spouse, children, grandchildren, or immediate family members.
  • For buying your first home, you can take out a maximum of $10,000. The IRS lets you take advantage of this exception even if it's technically not your first home. As long as you haven't owned a principle residence in the past two years, you're allowed to withdraw for a home purchase. However, you must use the money within 120 days of taking your distribution.
  • The year after you give birth to a child (or adopt a child), each spouse is allowed to withdraw up to $5,000 from their IRAs. If you withdraw due to a birth or adoption, you're also allowed to put back the money into your account without affecting your contribution limits for the year.
  • Money needed to prevent eviction or foreclosure.

Withdrawals made after the age of 59½

Once you turn 59½ years old, you can start taking qualified distributions. There is no 10% penalty, but you still have to pay regular income taxes on the amount you withdraw because you deferred taxes when you contributed to your traditional IRA. In comparison, a Roth IRA has tax-free withdrawals because you already paid income taxes when you made your contributions.

You're not required to withdraw money from your traditional IRA when you reach the age of 59½. This is simply the age where you can start taking distributions without any penalties.

How much taxes will I have to pay?

The amount you'll owe in taxes is based:

  • The tax bracket that you're in the year you make a withdrawal.
  • Tax rates at the time of withdrawal.

Required minimum distributions (RMD)

Sadly, you can't just keep money in your tax-deferred IRA forever. Once you reach the age of 72, the IRS requires that you start taking distributions from your account each year until it's emptied. All retirement accounts, except for the Roth IRA, has required minimum distributions.

When do I have to take my first RMD?

You must take your first RMD by April 1st, the year after you turn 72 years old. For all future RMDs, your deadline is December 31, each year until your account is emptied. For example, if you turned 72 this year, you'll have until April 1, next year to take your RMD.

What are the penalties for not taking an RMD?

If you fail to take your RMD, you'll be hit with a 50% penalty on the amount you were supposed to withdraw. For example, if your RMD was $2,000, you'll have to pay $1,000 of that to the IRS. Penalties for failed RMDs are extremely steep, which is why it's so important to keep track of your RMD calculations each year.

How much RMD do I need to take?

To calculate your RMD, the IRS takes the balance from your traditional IRA as of December 31, the previous year, and divides it by your life expectancy factor.

Your life expectancy factor can be viewed using our RMD table or by using the table displayed below:

Age Life Expectancy Factor Percentage of Account Balance
72 29.1 3.44%
73 26.5 3.78%
74 25.5 3.93%
75 24.6 4.07%
76 23.7 4.22%
77 22.9 4.37%
78 22 4.55%
79 21.1 4.74%
80 20.2 4.96%
81 19.4 5.16%
82 18.5 5.41%
83 17.7 5.65%
84 16.8 5.96%
85 16 6.25%
86 15.2 6.58%
87 14.4 6.95%
88 13.7 7.30%
89 12.9 7.76%
90 12.2 8.20%
91 11.5 8.70%
92 10.8 9.26%
93 10.1 9.91%
94 9.5 10.53%
95 8.9 11.24%
96 8.4 11.91%
97 7.8 12.83%
98 7.3 13.70%
99 6.8 14.71%
100 6.4 15.63%
101 6 16.67%
102 5.6 17.86%
103 5.2 19.24%
104 4.9 20.41%
105 4.6 21.74%
106 4.3 23.26%
107 4.1 24.40%
108 3.9 25.65%
109 3.7 27.03%
110 3.5 28.58%
111 3.4 29.42%
112 3.3 30.31%
113 3.1 32.26%
114 3 33.34%
115 2.9 34.49%
116 2.8 35.72%
117 2.7 37.04%
118 2.4 40.00%
119 2.3 43.48%
120+ 2 50.00%

As you can see by the percentage of account balance, you're required to withdraw larger amounts as you get older. At the age of 72, you're required to withdraw 3.44% of your account balance. By the time you reach 90, you're required to withdraw 8.2% of your account. RMDs must be taken every year until your account is emptied.

Can I withdraw my contributions from a traditional IRA?

A Roth IRA lets you withdraw contributions from your account at any age, without any penalties or taxes. This rule does not apply to the traditional IRA. Any distributions taken before the age of 59½ are subject to the 10% penalty plus income taxes.

Do I need to pay taxes when I withdraw from my traditional IRA?

Yes. A traditional IRA is funded with pre-tax dollars. You make contributions with money that you haven't paid taxes on yet. Your taxes get deferred until retirement, and withdrawals are taxed as regular income.

Is there a 5-year rule with a traditional IRA?

No, a traditional IRA does not have a 5-year rule, which states that in addition to being at least 59½ year old, your retirement account must also be at least 5 years old in order to take qualified distributions. The 5-year rule only applies to Roth retirement accounts, like the Roth IRA.

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