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Overview
Saving for future retirement can be a little tricky, depending on how secure you want your retirement funds to be. IRAs are a common way of building up a good retirement nest egg. However, you will need to understand the rules for withdrawing funds from Roth, Traditional and Education IRAs (now known as Coverdell Education Savings Accounts) in order to maximize their value.
Purpose of IRAs
The Individual Retirement Account (IRA) is a United States retirement plan that offers tax advantages for saving money you have now in order to use when you retire from the working world. Differing IRA types have limitations on contribution amounts and beneficiaries. You can withdraw IRA funds at any time, but there are differing penalties and tax amounts, depending on what type of IRA you have.
Roth IRAs
Roth IRA contributions can be withdrawn at any time without taxation, so long as they are a qualified distribution. A qualified distribution can be made after age 59 1/2, to a beneficiary upon your death, if you are disabled according to IRS code, or to pay a first-time home buyer expense. Withdrawals made before age 59 1/2 are also subject to a 10 percent "early withdrawal penalty." To avoid a penalty, there also must be a 5-year wait from the first taxable year in which a contribution was made to the IRA.
Traditional IRAs
Traditional IRA withdrawals are a little more restrictive. A traditional IRA withdrawal is always subject to income tax, regardless of when the money is distributed. A 10 percent excise tax applies to withdrawals before age 59 1/2. Mandatory distributions also begin at 70 1/2. If you do not take them, you will face a 50 percent excise tax on whatever is not distributed.
Coverdell Education Savings Accounts
Coverdell ESAs are designed to help save money for college. For withdrawals that exceed actual qualified education expenses, the excess amount will be assessed a 10 percent penalty. When the beneficiary reaches 30, the funds must be distributed within 30 days or they will be taxed as well as face a 10 percent penalty. This can be avoided if the beneficiary transfers the funds to another person under 30.
Penalty Exemptions
Early withdrawal penalties do not apply in certain special conditions for both Roth and Traditional IRAs. If the owner dies or becomes disabled, the penalty will not be assessed. Withdrawal penalties can also be avoided if the owner meets certain unemployment qualifications, pays for medical expense reimbursements of a specified amount, pays back taxes, or pays for higher education expenses.
