There are two main types of IRA accounts: Roth IRAs and Traditional IRAs. IRA stands for Individual Retirement Account, in case you were wondering. In order to understand your rules and penalties regarding IRA distribution, you have to know which type of account you have, as well as which rules it follows for distributing funds. Here are some tips to help:
Roth IRA Distribution:
-Money can be withdrawn at any time without tax consequences.
-Qualified distributions will not have taxes on them because the contributions come from post-tax dollars. If a withdrawal is NOT qualified, you will pay a 10% early withdrawal fee and be required to pay taxes on that withdrawal.
-There is not required schedule or amount to be withdrawn after age 70 ½. In fact, you can continue making contributions to this account, if you choose, for the remainder of your lifetime.
-IRA earnings qualify for distribution by being in the account for five years, by you being age 59 ½ or older, disabled, being used by your beneficiaries after death, or by being used for the purchase of your first home (up to $10,000).
Traditional IRA Distribution:
-Cannot be taken until age 59 ½ or older without a 10% penalty and income tax charges, with certain exceptions: death, disability, medical expenses that exceed 7.5% of your income, health insurance for unemployed parties, higher education expenses, first time home purchase, or for excess contributions.
-Traditional IRA contributions CAN be taxed.
-You can get in trouble for taking early distribution or not taking enough by age 70 ½.
-If you are age 70 ½, you have to take Required Minimum Distributions by April 1st in the year after you become this age. If you do not, you will pay a 50% penalty on the difference between what you took and what you were supposed to take.
Example: Your RMD (Required Minimum Distribution) annually is $10,000. You only take out $4,000 because that is all you need. You will then pay a $3,000 penalty, which is half of the $6,000 difference between the money you took and what you should have taken.
These are the basics that you need to understand when it comes to IRA distribution. However, you should always consult the professional advice of your financial advisor or another investment expert in regards to your particular situation, because this is not intended to be legal or tax related advice of any kind. It is merely provided for educational purposes.