IRA Withdrawal Rules: Early Withdrawal Penalty & Exceptions

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If you’re funding your retirement through an Individual Retirement Account (IRA), you’ll want to know the IRA withdrawal rules to avoid early withdrawal penalties.

You can withdraw funds from your IRA penalty-free after the age of 59½ with some exceptions. And if you have a traditional IRA, the government will require you to withdraw a portion of your money once you turn 72.

In this article, I’ll explain the IRA withdrawal rules in more detail and lay out potential exceptions for both Roth and traditional IRAs.


Table of Contents


IRA Withdrawal Rules

The important ages to remember within the world of tax-advantaged retirement accounts are 59½ and 72.

I’ll talk more about age 72 and Required Minimum Distributions later in this article. But know that you can withdraw your money from an IRA penalty-free at 59½. (Note that you’ll still owe income tax on traditional IRA withdrawals.)

There are exceptions for both Roth and traditional IRAs that allow you to withdraw penalty-free prior to age 59½. Traditional IRAs have many more exceptions than Roth IRAs.

The longer you leave your money in an IRA, the more time it will have to grow. So think through your circumstances carefully before choosing to withdraw from your IRA account while you’re still in your 50s.


IRA Early Withdrawal Penalty

The IRS slaps you with a 10% early withdrawal penalty if you take money out of your IRA prior to reaching 59½ years old. That’s assuming you don’t qualify for an exception.

If you have a traditional IRA and withdraw early, you’ll also owe income tax on every cent you take out. So in addition to the 10% penalty, your withdrawals will increase the income that you report on your tax returns. You’ll owe federal income tax, and you may owe state tax.

If you have a Roth IRA and you withdraw early, you’ll pay a 10% early withdrawal penalty only on your earnings. You can take out your Roth contributions at any time, because the government already has taxed those dollars.

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You’ll also pay an opportunity cost on early withdrawals. Think about all the years you could be getting tax-free (Roth) or tax-deferred (traditional) investment earnings.

If you’re 59½ but have a Roth IRA account that’s less than five years old, you’ll also get hit with a 10% early withdrawal penalty on your investment earnings.

(Money expert Clark Howard strongly recommends building an emergency fund before you start investing. Just one of its benefits is to keep you from having to withdraw retirement savings early.)


Required Minimum Distributions (RMDs) for IRAs

One unique aspect of a Roth IRA is that you don’t have to take any RMDs – ever — if you’re the account’s original owner.

It’s the only type of retirement account that holds that distinction. As such, it’s perfect if you’re hoping to leave some or all of your retirement funds to your children.

With traditional IRA withdrawal rules, you don’t have to pay taxes on your contributions or earnings until you withdraw during retirement. But the IRS does eventually want a cut of that money. It requires you to start taking distributions from your traditional IRA once you turn 72 years old.

You need to make your first withdrawal by April 1 the year after you turn 72. Subsequent yearly withdrawals are due by Dec. 31. Consider taking your first RMD during the year you turn 72, or else you’ll have to take two “annual” withdrawals the next year. That could lead to negative tax consequences.

If you don’t take out the required amount of money, the IRS fines you 50% of every dollar that you’re short. In other words, if you’re supposed to take out $10,000 and you don’t take out any, you’ll owe 50% of $10,000 in penalties — or $5,000.

The IRS uses a life expectancy table as part of its formula that determines how much you’re required to withdraw each year. Your IRA custodian may calculate your RMDs for you. It’s possible to calculate them yourself as well. If you’re married and your spouse is a) more than 10 years younger than you and b) your sole beneficiary, use the Joint Life and Last Survivor Expectancy Table to calculate your RMDs.

Whether you hold a Roth or a traditional IRA, if you inherited the account, you may be required to take distributions within a certain period.

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Early Withdrawal Penalty Exceptions

Normally, you have to wait until you’re 59½ to withdraw from your IRA penalty-free. But there are exceptions.

For example, you can use a SEPP for both types of IRAs. SEPP stands for Substantially Equal Periodic Payment.

The benefit of a SEPP program is that you can make penalty-free withdrawals from your IRA at any age. However, you must commit to withdrawing a substantial amount for five years or until you turn 59½, whichever is longer. Also, you must stop contributing to an IRA if you want to withdraw via a SEPP program.

Traditional IRAs hold more exceptions than Roth IRAs. Traditional IRA exceptions include:

  • First-time home purchases (must use funds within 120 days; there’s a lifetime pre-tax limit of $10,000)
  • Post-secondary education
  • Disability or death
  • Medical expenses greater than 10% of your Modified Adjusted Gross Income (MAGI).
  • Birth of a baby or an adoption (up to $5,000)
  • Health insurance premiums (if you’ve been unemployed for 12+ weeks)
  • IRA tax levies
  • Reservists called to active military duty for 180+ days

If you have a Roth IRA, your account must be at least five years old. Otherwise you’ll get hit with a 10% early withdrawal penalty on your investment earnings regardless of your age.

If your Roth IRA account is at least five years old, Roth IRA exceptions prior to 59½ include:

  • Disability or death
  • Qualified home purchases

You may need to file IRS Form 5329 with your annual tax return if you claim one of these exceptions.

If you withdraw from your IRA after your 55th birthday, you may be able to “reverse roll” your funds into your 401(k) at work, leave your job and use the Rule of 55 to make penalty-free withdrawals.


Tax Strategies for IRA Withdrawals

Taking money out of your traditional IRA will create tax consequences.

With traditional retirement accounts, you defer taxes until you withdraw. So you’ll owe taxes on the money you put in as well as on your investment earnings.

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Consult with a financial advisor or a Certified Public Accountant about your specific circumstances. But you may be able to lower your tax burden once you start making withdrawals from a traditional IRA by using the following strategies:

  • Defer Social Security benefits. Clark always recommends waiting as long as you can before you start drawing Social Security. You’re able to do so as young as 62 years old. Deferring Social Security is a way to reduce your tax burden by limiting your income while you’re taking IRA withdrawals.
  • Practice tax-loss harvesting. If you have a taxable investment account and you sell investments that have lost money, you can offset some of the taxable income that you’ll generate by withdrawing from your traditional IRA.
  • Avoid getting pushed into a higher tax bracket. Be careful not to take out enough money in a calendar year to push you into a higher tax bracket. Keep track of your income and take traditional IRA distributions up to the upper limit of your tax bracket if you can.

You can’t borrow against an IRA like you can with a 401(k). But you’re allowed to take money out penalty-free as long as you roll it into another IRA within 60 days.


Final Thoughts

Using an IRA to save for your retirement is smart. But if you’re not aware of the IRA withdrawal rules, the IRS can hit you with costly penalties.

If at all possible, avoid early withdrawal penalties and penalties for failing to take Required Minimum Distributions.


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