IRA Disbursement Rules

By Bill Herrfeldt

  • Overview

    Generally, an individual retirement account (IRA) cannot be touched until you reach 59 1/2 years old. The government imposes a 10 percent penalty if funds are withdrawn prior to that age. This penalty is in addition to the income tax owed on the appreciated portion of the funds withdrawn. Also, you are required generally to begin making payouts of the IRA when you become 70 1/2 years old. Failure to do so incurs a hefty penalty of 50 percent of the funds that should have been withdrawn. There are exception to both rules, however.
  • Exceptions

    Withdrawals of a portion or all of your IRA can be made without penalty before you reach 59 1/2 years of age under certain circumstances. Of course, income tax on the appreciated portion of the withdrawals will be due at the time these withdrawals are made. If you wish to take advantage of any of these exceptions, check first with your tax adviser. 1. Until you find a job to replace the one you lost, you can pay health insurance premiums from your IRA. 2. Medical expenses in excess of 7.5 percent of your adjusted gross income can be paid from your IRA. 3. You can use funds from your IRA if a doctor certifies that you cannot work. 4. If you die, your IRA can be distributed to your heirs. 5. College tuition can be paid from your IRA. 6. You can use up to $10,000 of your IRA for the purchase of your first home, or 2 years after one was sold. 7. If you take out about the same amount from your IRA each year, and you do so for at least 5 years. 8. If you roll over an IRA to a new one.
  • Time Frame

    Distribution of funds from your traditional IRA must begin when you reach 70 1/2 years of age. The federal government requires you to at least withdraw the minimum distribution requirement (MDR) that is based on actuarial figures. Failure to make those withdrawals will result in a 50 percent penalty.
  • Roth IRA

    If you have established a Roth IRA, the MDR rules do not apply because of the difference between a Roth and a traditional IRA. Basically, you make contributions to your Roth IRA from after-tax dollars, and the amount you contribute will enjoy appreciation with no further tax due.
  • Simple IRA

    If an employer has established a simple IRA for you, the same rules and exceptions apply that apply to a traditional IRA. However, if you withdraw money within 2 years of its being created, the penalty is raised to 25 percent from 10 percent.
  • Warning

    The taxpayer needs to know the withdrawal rules to avoid the stiff penalties the government imposes on IRAs. The federal government relies on the penalties it imposes, and it receives a yearly reconciliation from the company managing the account so that it can stay abreast of its activity.
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