Explanation of IRA Withdrawal Rules

When you’re ready to take withdrawals from your IRA, you’ll find there are plenty of rules to follow. Failure to stick to these guidelines could have serious ramifications. The most notable among these is a 10% penalty tax on IRA withdrawals made before age 59 ½. Beware, though, as traditional and Roth IRAs have two distinct sets of requirements. As always when making nuanced financial decisions, it can be helpful to consult a financial advisor.

Withdrawal Rules for Traditional IRAs

Traditional IRAs give you a tax break at the time of contribution. And the earnings you make in the account grow tax-deferred. But when you retire, you pay income taxes on the withdrawals you take.

At age 59 ½, traditional IRA holders attain full control of their account’s assets. In other words, all withdrawals will be free of any tax penalties, aside from the aforementioned income taxes. Anyone older than 73 will additionally need to adhere to required minimum distributions (RMDs), but we go over that below.

What if money is tight and you need to make a withdrawal from your traditional IRA before age 59 ½? In this case, you’ll pay a 10% early withdrawal penalty that the IRS levies. Plus, your withdrawals will be taxed as income.

There are, however, some exceptions. You can take early distributions without paying a penalty if those withdrawals are for one or more reasons on the approved list from the IRS. More specifically, this refers to withdrawals for expenses related to medical needs, health insurance, college, a first-time home purchase, disability, military service (longer than 179 days) and more.

Withdrawal Rules for Roth IRAs

You can withdraw the contributions you make to a Roth IRA at any time without paying taxes or penalties. This flexibility is one of the key benefits of a Roth account. The rules change when it comes to the earnings portion of your Roth IRA. If you withdraw earnings before age 59 ½, you may owe both income taxes and a 10% early withdrawal penalty, unless you qualify for an exception.

The Roth IRA “five-year rule” determines whether your earnings can be withdrawn tax-free. To meet it, at least five tax years must have passed since Jan. 1 of the year you made your first Roth IRA contribution. This rule applies regardless of your age. Even if you turn 59 ½, you must also satisfy the five-year requirement for your distribution to be considered “qualified.” Qualified distributions are tax-free, while those that do not meet these criteria are considered “non-qualified” and may be taxable or subject to penalties.

A separate five-year rule applies to Roth IRA conversions. For each conversion you make, you must wait five years before withdrawing the converted amount without a 10% penalty, unless you meet an exception (including reaching age 59 ½). This rule is designed to prevent investors from using conversions as a way to access retirement funds early without penalty.

IRA Required Minimum Distributions (RMDs)

According to IRS tax law, owners of traditional IRAs must start taking RMDs at age 73 (75 for those born in 1960 or later). How large your RMDs will be depends on your life expectancy, so it’s different for everyone. The initial RMD deadline is April 1 of the year following the year during which you turn 73. After this, your continuing annual RMD deadline will slide back to Dec. 31.

Roth IRAs are subject to an entirely different set of rules. In fact, Roth account holders don’t have any RMDs whatsoever. Every bit of your balance is tax-free, so you can complete qualified withdrawals whenever you see fit. Most non-spouse beneficiaries who inherit Roth IRAs must withdraw the entire balance within 10 years. However, certain eligible beneficiaries, including spouses, disabled individuals, chronically ill individuals and minor children, can take distributions over their life expectancy.

IRA Rollover Rules

Want to perform a rollover from a 401(k) to an IRA or from a traditional IRA to a Roth IRA? Because 401(k)s and traditional IRAs are both funded with pre-tax dollars, it’s easy to do a rollover from a 401(k) to a traditional IRA. IRA rollover rules give you 60 days to make the rollover. If you keep your money for more than 60 days without performing the rollover the money will be treated as a withdrawal and taxed and penalized accordingly. To make things easy on yourself and avoid the chance of missing the 60-day deadline, ask the brokerage that houses your IRA to help you enact a direct rollover.

What about a rollover to a Roth IRA? You may decide to rollover your existing retirement account to a Roth IRA because you want to work with a different, lower-fee brokerage, or because you want to take advantage of the tax benefits of a Roth IRA. You can roll over traditional IRAs, 401(k) plans, Roth 401(k)s, 457(b)s and more into Roth IRAs. The only potential problem is with a SIMPLE IRA, which you can only roll over to a Roth IRA after two years. If you rollover a pre-tax account like a traditional IRA to a Roth IRA you’ll need to pay conversion income taxes on the contributions, earnings and interest your traditional IRA accumulated.

Some people choose what’s known as a backdoor Roth conversion to get around income caps for contributing to a Roth IRA. With a backdoor Roth, high earners can contribute to a nondeductible traditional IRA and then do a rollover to a Roth IRA.

Bottom Line

Understanding how distributions, penalties, tax treatment and rollover options work for different types of IRAs can help you make choices that fit both your current needs and long-term plans. Each account type has its own set of timelines, eligibility requirements and tax considerations, as well as exceptions that may apply in specific situations. By knowing how these rules operate for traditional and Roth IRAs, you can decide when and how to access your savings in a way that supports your broader retirement goals.

Tips for Getting Retirement Ready

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