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Summary

You can take money out of an IRA at any time you want, but if your withdrawal ("distribution") is made before age 59 1/2, you may have to pay penalties in addition to whatever income taxes might be due. There are, however, times where a premature distribution will not incur a penalty (even though it still incurs income tax):

  • Withdrawals made after age 59 1/2 are not subject to a penalty.
  • You are "disabled" as defined by the Internal Revenue Service.
  • The amount you withdraw is no more than the cost of your medical insurance for the tax year in question
  • You have deductible medical expenses not reimbursed by insurance and in excess of the threshold. The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers.
  • You elect to take equal periodic payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary.
  • You have qualified higher education expenses at an eligible educational institution.
  • You use the distributions to buy, build, or rebuild a first home, including a cooperative or condominium.
  • You, as a nonparticipant in the plan, receive a distribution under a qualified domestic relations order.
  • A taxable IRA distribution is transferred directly to your Health Savings Account (HSA).

You can also borrow from an IRA.

If you have a traditional IRA, you MUST withdraw money by April 1 of the year following the year in which you become age 70. NOTE: IF YOU MISS A DEADLINE for taking money out of an IRA, ask for a penalty waiver. You must show you had reasonable cause for the goof - such as serious illness, and that you have taken steps to withdraw the amount. See IRS Form 5329 and attach a letter of explanation. 

For additional information, please see:

To Learn More

How To Withdraw Money From An IRA Without Penalty

Withdrawals made after age 59 1/2 are not subject to a penalty.

You can make a withdrawal from an IRA before age 59 1/2 without incurring a penalty in any of the following circumstances:

  • You are "disabled" as defined by the Internal Revenue Service.
    • According to the IRS, you are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long continued and indefinite duration.
  • The amount you withdraw is no more than the cost of your medical insurance for the tax year in question. All of the following must also be true:
    • You lost your job.
    • You received unemployment for 12 consecutive weeks (or would have if you weren't self-employed).
    • You made the withdrawals during either the year you received the unemployment compensation or the following year.
    • You made the withdrawals no later than a total of 60 days after you have been reemployed.
  • You have deductible medical expenses not reimbursed by insurance and in excess of the treshhold. (The threshold for the itemized deduction for unreimbursed medical expenses is 10% of the taxpayer’s Adjusted Gross Income (AGI). However, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the close of the tax year, the threshold is 7.5% of AGI. In 2017 the 10% threshold will apply to all taxpayers.) For purposes of illustration, we will use 7.5% of your adjusted gross income as the threshold:
    • If this exception applies to you, you can withdraw an amount up to the excess medical expenses without incurring penalties. To use this exception, pay the bills the same year.
    • For example, Ian had an adjusted gross income of $30,000 and unreimbursed medical expenses of $5,000. To determine how much he can withdraw from his traditional IRA without paying penalties, you would first multiply $30,000 by 7.5%, getting $2,250. Ian's medical expenses were $5,000. The difference between his medical expenses and 7.5% of his AGI is $2,750 ($5,000 - $2,250). So Ian can withdraw $2,750 without penalty. Keep in mind that like all withdrawals from a traditional IRA, this withdrawal is still subject to income taxes.
    • NOTE: You cannot take money from an IRA for medical reasons if your IRA is being used for periodic payments. If you are in this situation, consider splitting your IRA into two IRAs. Withdraw the money for medical expenses from the IRA which does not have periodic payments.
    • As noted above, if you are older than age 59 1/2, there is no 10% penalty, but you will have to pay taxes on the amount you withdraw.
  • You elect to take equal periodic payments over your life (or your life expectancy), or over the lives (or the joint life expectancies) of you and your beneficiary.
    • This is also known as "substantially equal periodic payments" (SEPP) or as "annuitizing" your IRA. Life expectancies are based on IRS tables - not your individual circumstances. The IRS tables include three ways to calculate payments. The most popular method is the "amortization method" because it usually provides the highest payment.
    • Once you start receiving withdrawals under the SEPP method,  you must continue with the method in order to avoid paying a 10% penalty on the withdrawals.. You can only change the life expectancy withdrawal method without penalty if you receive 5 annual payments and become disabled or reach age 59 1/2. Of course, all withdrawals are likely subject to income taxes.
    • On the other hand, if you stop making withdrawals before reaching the described benchmark, you will be subjected to the 10% penalty plus interest on all prior withdrawals.
    • If you want to find out your life expectancy for these purposes (not your real life expectancy mind you), look at IRS Publication 590 available at: http://www.irs.gov/pub/irs-pdf/p590.pdf offsite link.  If you want to start by determining the amount you want each year, you can use the calculator at www.72t.net offsite link which will tell you the amount of assets you need in an account to get the number you want. (Click on "calculators", then "SEPP calculators," then "SEPP Reverse Calculator."
    • To see how much you can take, use the 72(t) calculator at Bankrate.com.  Go to www.bankrate.com offsite link, click on "Calculators," then click on the Retirement tab. Look for the link to the 72(t) calculator).
    • NOTE: The rules regarding this type of withdrawal are complex. If you make a mistake, it could be costly.
  • You have qualified higher education expenses at an eligible educational institution.
    • "Qualified higher education expenses" include tuition, fees, books, supplies and equipment for the enrollment and attendance of a student at an eligible educational institution.
    • In addition, if the student is at least half-time, room and board will also be considered qualified expenses.
    • For these purposes, the student could be you, your spouse, child or grandchild.
    • The term "eligible educational institution" includes any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education. The institution should be able to tell you if it is eligible.
    • NOTE: The amount that you can take from you IRA for this reason cannot be more than the qualified expenses.
  • You use the distributions to buy, build, or rebuild a first home, including a cooperative or condominium.
    • The maximum amount that will be free of penalties in this case is $10,000. The term "first-time homebuyer" for these purposes only means that you did not own a home at any time during the previous two years.
  • You, as a nonparticipant in the plan, receive a distribution under a qualified domestic relations order.
  • A taxable IRA distribution is transferred directly to your Health Savings Account (HSA).
    • You can make this election only once a year. The dollar amount excluded from your income cannot exceed the annual limitation of your HSA contribution for the year.
    • You will lose this exclusion if you cease to be eligible to contribute to your HSA during the 12 months after you make this contribution. In that case, you'll owe income taxes and the 10% penalty.
  • Money you put into to the  during a calendar year can be withdrawn before the end of the year without tax or penalty if:
    • You did not deduct the amount on a tax return.
    • You withdraw the interest or other earnings earned on the money. You can take losses into account.

Tax Aspects Of Withdrawals From A Roth IRA

Withdrawals do not have to be in cash. You can withdraw securities rather than cash from your IRA. Note: as you'll see in the next section, there are times when withdrawals have to be made.

If you are older than age 59 1/2 on December 31st of the year you take the distribution, you will not have to pay any tax on either the amount you invested or the amount earned in the account as long as you had the plan for at least five years. The five-year period is measured from January 1st of the year for which the IRA was started. So,  if you start an IRA in early April, 2010 (for the year 2009), you will be able to access the funds without paying any income taxes as early as January, 2014.

If you did not have the plan for at least five years, then you will have to pay tax on any amounts withdrawn that exceed what you put into the plan.

If you withdraw money before age 59 1/2, you will not have to pay income taxes on any of the proceeds if both of the following apply:

  • You are disabled or making a first time home purchase. 
  • You have had the IRA for at least five years. The five-year period is measured from January 1st of the year for which the IRA was started. So even if you start an IRA in early April 2010 (for the year 2009), you will be able to access the funds without paying any income taxes as early as January, 2014.

If you withdraw money from your Roth IRA before you've had it for five years, the earnings in the plan will be taxable. The IRS will count your withdrawals as first coming from your contributions and then from your earnings. This means that you can withdraw money tax-free at any time from a ROTH IRA up to amount you contributed.

Tax Aspects Of Withdrawals From A Traditional IRA

Withdrawals do not have to be in cash. You can withdraw securities rather than cash from your IRA. Note: as you'll see in the section below, there are times when withdrawals have to be made.

The law does not distinguish between contributions and earnings when money comes out of an IRA.

If all of your contributions made to the IRA were deducted from your income taxes, then all of the distributions will be subject to income tax as ordinary income for the year of the withdrawal. The law does not distinguish between contributions and earnings when money comes out of an IRA. It's all taxed as ordinary income.

If some of your contributions were made with after tax-money, then some of your withdrawal will not be subject to income taxes. The amount that is taxed will be based on the ratio of non-deductible contributions to the total account value as of the last day of last year.

For example: Herb S. made both deductible and non-deductible contributions to his IRA. The total amount of his lifetime non-deductible contributions is $10,000. As of December 31, 2009, his IRA was valued at $100,000. He withdrew $3,000 from the account. To find the amount of the withdrawal that is not taxable, Herb would first divide 10,000 by 100,000, getting 1/10. Then, he'd multiply 1/10 by $3,000 getting $300. This is the amount of Herb's distribution that is not taxable. $2,700 of the distribution is taxable.

Borrowing Money From An IRA

Loans from an IRA are not technically permitted. However, you can borrow from an IRA tax and penalty free as long as the loan is repaid within 60 days. The time period can be extended with some planning.

The money may be used for any purpose.

If you do not satisfy one of the requirements for premature penalty-free withdrawals discussed above, you might have to pay taxes and penalties on the distributions. While trustees are not required to report loans, if a loan goes into default it becomes a distribution and the trustee must report it to the IRS.

Time period: You can borrow any amount up to the full balance in the account from an IRA tax free and penalty free as long as you return the money, or roll it over into another IRA, within 60 days. You are entitled to do this once every calendar year. You do not have to pay interest on the loan.

Limitation: You can only do this once a year for each account.

Reporting: Unlike other premature distributions from a retirement plan, the custodian of an IRA does not withhold any money from your distribution for income taxes, since it is expected that you will return the money and therefore not pay any taxes on it that year.

Purpose: Money borrowed from an IRA can be used for any purpose.

If you do not repay the mone within 60 days: If within 60 days after the withdrawal, you don't pay back the IRA or roll the money over into another IRA, the amount you withdrew will be subject to income tax and possibly also to penalties. The IRS used to make exceptions for some delays in repayments if the cause for the delay was beyond your control, but no longer does.

How to extend the loan time period: While you can borrow only once from an IRA within any 12-month period, you can extend the period of the loan because you are allowed to withdraw from other IRAs during the same period. If you have more than one IRA, you could actually use a withdrawal from a second IRA to pay the loan on the first. Then borrow from a third to pay off a second, etc. The result of using this strategy is that you'll actually have a long-term loan tax and penalty-free!

Even if you have only one IRA, if you have the ability to temporarily come up with an amount equal to the amount you withdrew at the end of each period, you can keep extending the loan by following these steps:

Step 1. Withdraw money from your IRA.
Step 2. Open a new IRA within 60 days.
Step 3. Deposit the funds you owe into the new IRA. (Remember, rolling the funds over will allow the loan to be tax and penalty-free).
Step 4. Withdraw money from your new IRA.
Step 5. Open a third IRA within 60 days.
Step 6. Repeat steps 3-5 until you have seven IRAs in total.

To make it easier to coordinate the opening of so many new accounts, all your IRAs can be with the same financial institution.

On the downside, you will pay for the maintenance of each account. Also, using this technique can be inconvenient.

When MUST I Take Money Out Of My IRA?

Traditional IRA

If you have a traditional IRA, you must begin taking distributions from it by April 1 of the year following the year in which you become age 70 ?. If you don't take the mandatory minimum distributions from your IRA, an annual excise tax equal to 50% of the difference between what you were required to take out and what you actually did withdraw may apply.

Use the chart below to compute your required minimum distribution. Take the account balance on December 31 of the previous year and divide it by the figure next to your age. If your beneficiary is your spouse and more than ten years younger than you are, use the joint-life-and-last-survivor table in IRS Pub. 590. It's available at www.irs.gov/publications/p590/ar02.html#d0e12335 offsite link.

AGE

DIVISOR

AGE

DIVISOR

AGE

DIVISOR

AGE

DIVISOR

AGE

DIVISOR

70

27.4

77

21.2

84

15.5

91

10.8

98

7.1

71

26.5

78

20.3

85

14.8

92

10.2

99

6.7

72

25.6

79

19.5

86

14.1

93

9.6

100

6.3

73

24.7

80

18.7

87

13.4

94

9.1

101

5.9

74

23.8

81

17.9

88

12.7

95

8.6

105

4.5

75

22.9

82

17.1

89

12.0

96

8.1

110

3.1

76

22.0

83

16.3

90

11.4

97

7.6

115+

1.9


EXAMPLE: Diana, who is 82 years old, has an IRA account worth $320,000 as of December 31st of last year. Her pension from a life-long career with the same company is enough to pay for her living expenses, even with a diagnosis of severe arthritis. Because of this, she only wants to make the minimum distribution possible from her IRA, since the distribution will be taxable. Her minimum distribution is $20,000: $320,000 (the account value as of December 31st of last year) divided by 17.1, the divisor for age 82.

Roth IRA

There are no requirements to withdraw money from a Roth IRA at any time.

                                                                                                               Edited by: Peg Downey, CFP, NAPFA
                                                                                                                                  Money Plans
                                                                                                                                  Silver Spring, MD
                                                                                                                                  January 2008