An Individual Retirement Account, or IRA, can help you save for retirement in several ways. But like any investment account, withdrawals may incur taxes and penalties; exceptions exist where this may not apply.
If you are considering withdrawing funds from an IRA, make sure that you consult with both the Internal Revenue Service (IRS) and a tax professional for guidance and specific rules. Here are some general rules:
Taxes
Withdrawals from traditional, rollover, SEP and SIMPLE IRAs will generally be taxed at your income tax rate; this could vary depending on circumstances surrounding their withdrawal and your age. However, you may owe no taxes depending on what happens upon withdrawing money from an IRA account.
For instance, you can withdraw funds from your IRA without penalty to cover unreimbursed medical expenses exceeding 10 percent of your adjusted gross income in any one year. Furthermore, withdrawals made while unemployed for more than 12 weeks also won’t incur penalties.
However, any distributions from your IRA prior to reaching age 59 1/2 will generally be taxed, including earnings from previous employer IRAs and investments held in your current one. You may be able to avoid tax by using funds within an IRA to purchase your first home, cover higher education fees or pay for birth or adoption costs of children.
Minimum distributions
As soon as you reach age 70 1/2, it is mandatory that you start taking required minimum distributions (RMDs) from traditional IRAs and most employer-sponsored retirement plans. Otherwise, the IRS will apply an IRS penalty fee.
Savers may make withdrawals from their IRAs without incurring penalties in certain instances, such as when buying their first home. First-time homebuyers can withdraw up to $10,000 of IRA funds for use towards this purchase – including “usual and reasonable settlement, closing and other costs associated with buying, building or rebuilding a house.
Your IRA allows for penalty-free withdrawals to cover unreimbursed medical expenses that exceed 10 percent of your adjusted gross income, as well as natural disaster-related withdrawals of up to $22,000 without penalty. Unfortunately, however, the SECURE Act of 2019 changed rules regarding inherited IRAs, effectively eliminating stretch IRA strategies; your beneficiaries should consult their tax professional regarding these new laws.
In-kind distributions
In-kind distributions offer an ideal way of transferring assets without incurring taxes; however, these transactions should not be conducted outside the legal boundaries of each jurisdiction – tax laws vary significantly across regions.
An in-kind distribution may be an ideal way of transferring shares or other illiquid investments to family members or transferring business interests or other types of property between companies, but it should always be discussed with a qualified tax professional prior to making such a distribution.
In-kind RMD transfers offer investors a solution that enables them to avoid selling assets that they no longer wish to hold, while simultaneously helping to lower tax bills by decreasing capital gains payments when selling shares later on. They may also reduce transaction fees associated with managing their IRA. It’s easy – simply calculate your RMD and notify your IRA custodian that you wish to transfer the shares into a taxable account.
Roth IRAs
Roth IRAs offer future retirees an appealing feature: tax-free withdrawal of investment earnings. But to take full advantage of this benefit, they must abide by certain rules; such as owning their Roth account for five years in order to take penalty-free withdrawals of earnings; in addition, withdrawals before age 59 1/2 can only qualify as “qualified” according to IRS standards if used for first home purchases, qualified education expenses or health insurance premium payments due to unemployment/disability and/or paying alimony/child support payments/alimony/support payments etc.
Your regular contributions (the money you add into your account) may be withdrawn at any time and without incurring taxes or penalties, while withdrawals of investment earnings (usually subject to income tax and an early withdrawal penalty of 10% ) usually fall under income tax withholding and early withdrawal penalties (unless one of the exceptions mentioned below applies.) Also note that the five-year rule applies for withdrawals of earnings including converted amounts and rollovers.
