If you have an IRA (Individual Retirement Account), you will have come across the terms “distribution” and “withdrawal”, which basically mean the same thing. This is because when you withdraw from your IRA, it is distributed to you. The name isn’t so important, however, but the minimum IRA withdrawal rates are. This is because there are consequences resulting from the rules governing them.
Traditional Minimum IRA Withdrawal Rules:
In traditional IRAs, there was the age 59.5 rule. This meant that you could not withdraw anything from your IRA until you were 59.5 years old. Should you need to withdraw before then, you would have to pay an extra 10% in tax as a penalty. This is part of the MDR (minimum distribution rule). The MDR also uses a life expectancy table, which sets the minimum IRA withdrawal for each year, which should mean that, by the time you die, you will have a zero dollar balance. These rules, however, don’t come into force until you are 70.5 years old.
Roth Minimum IRA Withdrawal:
If you have a Roth IRA, then you are also subject to the MDR. However, there is a qualified distribution within this, which you can start making after a five year taxable period. In order to qualify, you must be at least 59.5 years old, unless you are disabled or if you want to use the money to buy your first home.
Simple IRA Withdrawal Rules:
The simple IRA is almost the same as a traditional IRA, except that it has a two year period rule. This starts on the day of you joining your employer’s plan, which was the day the first contribution was made. If you want to withdraw within the first two years, you would have to pay a penalty, usually of 25%. This is much higher than the 10% associated with regular IRAs. However, there are exceptions to follow again as well, just as there are with every IRA.
Generally speaking, the minimum IRA withdrawal rules are quite easy to understand. You just need to know how long you have to hold a plan before you can withdraw without having to pay a penalty. You also need to know what the penalty is, and which exceptions may apply. Overall, however, you enter into an IRA for your retirement, which means you shouldn’t make any early withdrawals anyway.
The Tax Issue:
If you are self-employed, or if you work for a company that doesn’t offer a 403b or a 401k, then you should consider signing up for an IRA. This is because it is an opportunity for you to save, while at the same time allowing you to pay less taxes. However, there are some significant restrictions in place on these accounts, as well as penalties if you do not follow those restrictions.
The greatest restriction is related to age. You must be at least 59.5 before you can start making withdrawals, and you must start making withdrawals once you are 70.5. Anything withdrawn, regardless of your age, will then also be taxed, with the exception of the funds in the account that have already been declared non-deductible. Those are deposits above and beyond what you are allowed to place in an IRA tax free, which means you have already paid tax over it. The maximum allowable contribution for the IRA varies, but is a fixed amount and not an income percentage. Furthermore, if you contribute to an IRA as well as to a 401k and/or 403b, none of your deposits will be deductible.
Once you reach 59.5, you are allowed to withdraw from your IRA without penalties. Before that age, you can make other withdrawals, although this is subject to specific rules. For instance, you can withdraw from an IRA to pay for medical expenses, although this is restricted, unless you are disabled or if the plan holder has died.
It is also possible to withdraw early to buy a first home, or to pay for the education of a child or grandchild, although no more than the cost of the education can be withdrawn. Other conditions also exist, although they are rare. They should be stipulated in your personal plan, so if you do wonder whether there is a minimum IRA withdrawal you can make before you reach the right age, then do take a look in there.
Overall, however, should you withdraw when you are not yet 59.5, then you will have to pay a penalty, which is 10%, unless you have withdrawn based on one of the exemptions. You also have to pay full income tax on the amount that was withdrawn. Let’s say, for instance, that you lost your job and you need to make a withdrawal to pay for your monthly bills. Whatever money you spend on insurance premiums and medical expenses will be tax exempt, but you will have to pay a 10% penalty and income tax on everything else. Usually, this is withheld automatically from the distribution itself.
You could also consider a rollover instead. If you have an IRA in place, but your employer suddenly starts to offer a 401k or 403b plan, then it is possible to roll the amount that is in your IRA over to your other plan. This is beneficial, because it means you only have to manage one plan. Should you keep your IRA and also sign up to the other plan, you won’t be able to make any tax-deductible payments into the IRA anymore either.
If you have reached the age of 59.5, however, you can withdraw however much you want without having to pay a penalty. However, it isn’t until you reach 70.5 that you must start making the minimum IRA withdrawal. How much this is depends on your age and on your life expectancy. The aim is to ensure that someone who has such a plan has a zero balance by the time they die, which means an increasingly big percentage has to be taken out the older you get.