IRA Withdrawal Rules: What to Know Before You Retire
Planning for retirement involves more than just saving money; it’s also about understanding how and when to access your retirement funds. SouthStar Bank proudly offers Individual Retirement Accounts (IRAs) to support your retirement goals. These accounts provide unique benefits targeted at putting you in a great position to retire when your career comes to a close. While these accounts offer several benefits, your IRA will also have withdrawal restrictions. Understanding these restrictions is crucial to avoiding penalties and getting the most out of your IRA.
Before diving into withdrawal rules, it’s essential to review the two primary types of IRAs: Traditional IRAs and Roth IRAs. The rules for withdrawing funds differ depending on which one you have.
- Traditional IRA: Contributions are typically tax-deductible when you make them, but withdrawals are taxed as ordinary income.
- Roth IRA: Contributions are made with after-tax dollars, so you won’t pay taxes on withdrawals if certain conditions are met.
A crucial milestone for both Traditional and Roth IRAs is reaching the age of 59½. Once you reach this age, you can withdraw from your IRA without facing the IRS’s 10% early withdrawal penalty. However, some specific nuances depend on the type of IRA.
Traditional IRA Withdrawals
As mentioned previously, contributions made to Traditional IRAs are tax-deductible. This means that withdrawals made after the age of 59½ won’t be penalized but will be subject to income tax unless you’ve made non-deductible contributions to your account. The IRS mandates that you start taking Required Minimum Distributions (RMDs) from your Traditional IRA at age 73.
Roth IRA Withdrawals
For Roth IRAs, the rules are a bit more flexible. You can withdraw your contributions at any time (after the age of 59½), tax and penalty-free, since those contributions were made with after-tax dollars. However, to withdraw earnings without taxes or penalties, you must meet two conditions:
- You must be at least 59½ years old.
- Your Roth IRA must have been open for at least five years.
If you withdraw earnings before meeting these requirements, they could be subject to taxes and a 10% penalty.
Required Minimum Distributions (RMDs)
As mentioned, Traditional IRAs require RMDs starting at age 73. These are the minimum amounts you must withdraw each year, which are based on your account balance and life expectancy. Roth IRAs, however, do not require RMDs during the account holder’s lifetime, making them an attractive option for those who want to leave their IRA funds to heirs.
The 10% Early Withdrawal Penalty
If you need to access your IRA funds before age 59½, you’ll generally face a 10% early withdrawal penalty. However, there are several exceptions to this rule. Some of the most common exceptions for both Traditional and Roth IRAs include:
- Disability
- First-time home purchase (up to $10,000)
- Qualified education expenses
- Medical expenses exceeding 7.5% of your adjusted gross income
- Health insurance premiums during unemployment
It’s essential to check whether your specific situation qualifies for an exception before making an early withdrawal.
Planning Ahead
Understanding the rules surrounding IRA withdrawals is essential for making informed decisions about your retirement. While the 59½ and 73 age milestones are key, planning for taxes and RMDs ahead of time can help you avoid unnecessary penalties.
Have more questions regarding IRA withdrawals or looking to open an IRA to kickstart your retirement? Contact your local SouthStar Bank branch or reach out to our IRA experts at IRA@southstarbank.com.
