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Updated on Thursday, February 14, 2019
Putting money away into an IRA is great for your long-term retirement goals. But what if it’s time to start taking money out?
Traditional IRAs, or individual retirement accounts, allow you to contribute to your retirement tax-free. When you add money to your retirement account, you aren’t getting taxed on it. However, when you make withdrawals, you will be expected to pay taxes.
That’s different from a Roth IRA — contributions for this type of account are taxed. But when you make qualified withdrawals from a Roth IRA, it comes out tax-free.
How these accounts function remains the same year after year, but specific IRA withdrawal rules can fluctuate and change over time. Here are a few key things to keep in mind when planning traditional IRA withdrawals in 2021.
What to do if you’re younger than 59 and a half
Traditional IRA withdrawals are considered early if you take money out before you turn 59 and a half years old. By taking money out sooner than this, you could face a 10% tax penalty. Otherwise, you might qualify for an exception if you meet IRS requirements. If you have immediate medical needs or home affordability issues, for example, you might qualify.
What to do if you’re older than 59 and a half
If you’re older than 59 and a half, withdrawals are penalty-free. That means you can take money out of your account without getting punished with extra costs. Keep in mind that for traditional IRAs, your withdrawals are taxable, including the earnings on the money you contributed. This is part of the normal taxation process and is separate from an additional tax penalty.
IRA distribution rules if you’re 70 and a half
If you have a traditional IRA, you’ll need to start taking required minimum distributions (RMDs) from your retirement account when you turn 70 and a half. This isn’t required for Roth IRA accounts; you can wait as long as you’d like to start taking money out of Roth IRAs.
The amount of your required minimum distribution amount varies. RMDs are calculated by your age and how much money is in your account. The IRS provides worksheets to calculate your RMD.
Skipping the RMD can be costly — failing to take it out means facing up to a 50% tax on the amount you should’ve taken out.
When are traditional IRA withdrawals penalty-free?
If you’re looking to take money out of your IRA without getting a tax penalty, you’ll need to meet at least one of the following criteria:
- Your age: The earliest you can start taking money out without getting punished with a 10% tax penalty is 59 and a half years of age. If you take money out before then, you won’t receive a penalty if you qualify for an exemption.
- Your home: If you’re a first-time homebuyer, you can use up to $10,000 from your IRA to cover the costs. If you need money for closing costs, your IRA funds could help without penalty.
- Your health: Medical expenses that exceed a certain percentage of your income could be withdrawn from your IRA without penalty. Along with that, permanent disability allows for an exemption as well. If you’ve experienced health issues, consider using your IRA money to reduce some of the costs.
- Your education: You can put your IRA money towards qualifying higher education costs, such as tuition, for you or your dependents.
You might feel like you’ve been contributing to your traditional IRA forever, but there will be a time when you can start making withdrawals. And that time can come earlier than you think.
Whether it’s your age or financial situation, you might be able to get penalty-free money from your traditional IRA before you hit 59 and a half. However, your account may fare better if you leave the money untouched until you’re required to start taking withdrawals at 70 and a half.
If you need your IRA money sooner than you would’ve hoped, there are options for doing so.
However, it may be hard to recover the lost funds and get your retirement savings back on track. Use only as much money as you need, and when it’s time to pay yourself back later, contribute as much as the limit allows. Even though early withdrawals are allowed, be cautious with your traditional IRA funds.