IRA withdrawal rules: a complete guide
This article will take you through everything you need to know about IRA withdrawal rules for both a Roth and traditional IRA.
An IRA is a long-term savings account that allows you to save for retirement while benefiting from certain tax advantages.
The two most common IRAs are Roth IRAs and traditional IRAs.
There are several different kinds of IRAs, each with its own rules surrounding withdrawals.
A financial advisor can help you navigate the complex world of retirement planning and ensure you’re making the most of your money.
What is an IRA?
An individual retirement account, or IRA, is a long-term savings account that allows you to save for retirement while benefiting from certain tax advantages.
Traditionally, IRAs were used primarily by those who were self-employed, as they did not have access to a 401(k). However, nowadays, many people, including those with 401(K)s, also choose to open an IRA.
IRAs can be opened through a bank, an investment company, online brokerage, or a personal broker.
Once opened, account holders can contribute a maximum of $7,000 annually if they are under 50 or $8,000 if they are 50 or older.
With an IRA, you have a wide range of investment options, including stocks, bonds, mutual funds and exchange-traded funds (ETFs).
There are several different kinds of IRAs; the two most common are Roth and traditional IRAs.
What is the difference between a Roth and a traditional IRA?
While anyone with an earned income, regardless of income, can contribute to a traditional IRA, the same cannot be said for a Roth IRA.
If you are a single filer and want to contribute to a Roth IRA, your modified adjusted gross income (MAGI) must be less than $161,000 in 2024.
If you’re married and filing jointly, your joint MAGI must be under $240,000.
However, the main difference between a Roth IRA and a traditional IRA is in how they are taxed.
Contributions to a traditional IRA are tax-deductible. Your money grows tax-deferred, and you pay tax on withdrawals.
With a Roth IRA, contributions are made using after-tax money. Your money then grows tax-free, and you do not pay taxes on your withdrawals.
Each of these IRAs also has its own rules further surrounding withdrawals.
What are the Roth IRA withdrawal rules?
As mentioned, withdrawals or distributions from a Roth IRA are made tax-free.
However, this can only happen if the following two conditions are met:
You are at least 59½ years old
You have owned the Roth IRA account for at least five years
If you choose to withdraw from your Roth IRA without meeting these requirements, you may be subject to tax and penalties. These penalties can amount to 10% of your withdrawal.
There are certain situations where you can withdraw early from your Roth IRA without incurring these penalties. So, it’s vital to get expert financial advice before making any big decisions when it comes to your retirement savings.
Roth IRAs are also not subject to required minimum distributions (RMDs).
What are the traditional IRA withdrawal rules?
Traditional IRA withdrawals or distributions are taxed. These are taxed based on your ordinary income tax rate in the year you make the withdrawal.
Similar to a Roth IRA, withdrawals must be taken when you are at least 59½ years old, or you may incur a 10% penalty for early withdrawal.
Again, much like the Roth IRA, there are certain situations where you can make an early withdrawal from your traditional IRA without incurring the penalty, This includes buying your first home or paying for unreimbursed medical expenses.
A Roth IRA and a traditional IRA also differ when it comes to required minimum distributions, or RMDs.
Once you turn 73, you must start taking annual RMDs if you own a traditional IRA.
You must take your first RMD by April 1 of the year following the year you reach age 73. RMDs must then be taken by December 31 every year after that.
Your RMD is calculated by dividing your account balance as of the end of the preceding calendar year by a distribution period from the IRS’s “Uniform Lifetime Table.”
A financial advisor can help you calculate your RMD and ensure you comply with IRS regulations.
Get expert retirement advice
In retirement, there are countless rules and regulations you must follow to ensure you’re getting the most from your savings.
During what is meant to be a relaxing time, staying on top of it all can feel overwhelming and even daunting.
This is where a financial advisor can help. They can navigate the complex world of retirement financial planning for you and ensure you’re making the most of your money.
Unbiased can help you find a financial advisor perfectly suited to meet your needs.
Simply fill out a form with your requirements, and you will get matched with an independent SEC-regulated financial advisor who can ensure you’re on course to achieving your retirement goals.
Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.