IRA and Roth IRA Withdrawals

Investing in an IRA can have many benefits when saving for retirement. However, withdrawal and penalty rules can vary depending on your age and account type. Let’s take a look at the different types of IRAs as well as the rules for withdrawals at different age ranges.

The two main types of IRAs are a Traditional IRA and Roth IRA. Distributions from a Traditional IRA are typically taxed as ordinary income, subject to the IRA owner’s prevailing tax bracket at the time of the distribution. Distributions from a Roth IRA aren’t taxed if you meet certain criteria, which we will cover in a moment.

Age Ranges for IRA Withdrawals

When taking an IRA withdrawal, three age milestones can affect the treatment of distributions:

• Before age 59 ½
• Between 59 ½ and 72
• After age 72

Before age 59 ½:

IRA withdrawals made before age 59 ½ are typically considered “early distributions.” Early distributions from a Traditional IRA are typically taxed as ordinary income but will incur a 10% early withdrawal penalty; state tax penalties may also apply.

Early distributions from a Roth IRA also face a 10% penalty unless the distribution is considered a qualified distribution. A qualified Roth IRA distribution is any payment or distribution that meets the following requirements:

• It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
• The payment or distribution is:
  1. Made on or after the date you reach age 59 ½
  2. Made because you are disabled
  3. Made to a beneficiary or to your estate after your death, or
  4. One that meets the requirements listed under the IRS’s First Home exemptions (up to a $10,000 lifetime limit)^[1]

Between 59 ½ and 72:

Once you reach age 59 ½, you can typically withdraw funds from your Traditional IRA without penalty. But remember: Deductible contributions and earnings—including dividends, interest and capital gains—will likely be taxed as ordinary income at your current tax rate.

Keep in mind that with a Traditional IRA, you can receive penalty free distributions once you reach age 59 ½, but you aren’t required to take them until you reach 72.

With a Roth IRA, you can typically withdraw funds with no taxes or penalties if you have met the five-year holding requirement. But if you withdraw funds from a Roth IRA that you have had for less than five years, your earnings will likely still be subject to taxes, but not the 10% penalty.

After age 72:

After age 72, you must take Required Minimum Distributions (RMDs) from your Traditional IRA. The amount you have to take varies from person to person, so you should contact your tax adviser to calculate the RMD amount that is right for your specific situation.

If you are the original owner of a Roth IRA, you generally don’t have to take distributions, even if you are over 72. However, if you are the beneficiary on a Roth IRA—meaning you inherited it—it’s possible you may have to take distributions.^[2] Otherwise, the withdrawal rules for Roth IRAs are the same as between ages 59 ½ and 72.

Exceptions to IRA Withdrawal Rules

There are some exceptions to the early IRA withdrawal rules in which you would avoid penalties. Code §72(t)(2) of the Internal Revenue Code lists these and other early withdrawal exceptions, subject to conditions:

• Medical expenses: To pay for medical expenses costing more than 10% of an individual’s adjusted gross income.
• Medical insurance: If you are unemployed for at least 12 weeks, you may withdraw funds penalty-free to pay health insurance premiums for yourself, your spouse and your dependents.
• Disability: You must be considered permanently and totally disabled for this exception to apply. See the IRS website for more information.
• Education: If you paid expenses for higher education during the year, part or all of any distribution you take may not be subject to the 10% additional penalty—even if you are under age 59 ½—as long as the education is for you, your spouse, or the children or grandchildren of you or your spouse.
• First-time home buyer: You don’t have to pay the 10% additional tax on up to $10,000 of distributions to cover first-time home expenses, which includes buying, building or rebuilding a first home. And if both you and your spouse are first-time home buyers, each of you can receive distributions up to $10,000 without having to pay the 10% penalty.
• Scheduled withdrawal: These are penalty-free if the withdrawals are of a “series of substantially equal payments,” known as a SEPP, but there are restrictions.
• Reservist distributions: Typically, members of the military and National Guard who are called to active duty can usually take penalty-free distributions.
• Birth or adoption expenses: You may withdraw up to $5,000 from a retirement account penalty free to help cover birth or adoption expenses within the first year.

Even though these exceptions may allow you to avoid early withdrawal penalties, keep in mind that investors may still owe any applicable taxes. Make sure to talk to your tax adviser before taking any early distributions to see how you may be affected.

Need More Help?

For more information, download our 401(k) and IRA Tips brochure, which discusses the difference between Traditional and Roth IRAs, withdrawal and contribution considerations, RMDs and other educational information for investors.

The contents of this document should not be construed as tax advice. Please contact your tax professional.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

[1] Source: Internal Revenue Service, as of 4/16/2018. https://www.irs.gov/publications/p590b - en_US_2016_publink1000230922.

[2] Make sure to check with your tax adviser to see what applies to your situation.