Traditional IRA Withdrawal Rules You Need to Know

Traditional individual retirement accounts, or IRAs, have tax advantages that can help you grow your retirement savings. However, you'll need to follow some IRA withdrawal rules to avoid costly tax penalties.

The first point to know is that you'll pay taxes on withdrawals from traditional IRAs. If you made tax-deductible contributions, you'll owe taxes on the entire distribution. If you made after-tax contributions because you didn't qualify for a deduction, you'll pay taxes only on the earnings.

There are also some important rules to know around when, how and for what purposes you can withdraw from a traditional IRA without incurring penalties.

Mandated withdrawals

Traditional IRAs have required minimum distributions, or RMDs. These are minimum amounts you must start taking out annually once you reach a certain age: 72, or 70 1/2 if you reached that age before January 1, 2020. If you don't take the required payout on time, you'll likely face a tax penalty equal to 50% of the amount you should have withdrawn.

You can delay your first required withdrawal until April 1 of the year following the calendar year you reach the designated age. Subsequent payments must be taken by December 31 of each year, which means you could receive two distributions during a single tax year if you delay your initial withdrawal until the following year.

The amount you must take out depends on how much you saved in the account and your life expectancy, or applicable distribution period according to tables provided by the IRS. If you have more than one traditional IRA, you calculate the minimum amounts due for each one, but you can take the total amount from one or more of your accounts.

You can avoid paying taxes on the payout if you make it a qualified charitable distribution—your IRA's trustee will send the funds directly to a charity.

Congress occasionally creates legislation that temporarily changes the rules about RMDs. For example, the CARES Act that was passed in response to the COVID-19 pandemic waived these mandatory withdrawals for 2020.

Penalty-free ways to access funds

You can take distributions from your traditional IRA without being subject to a 10% early withdrawal penalty if you're at least age 59 1/2 or qualify for certain exceptions.

Here are some of the most common life circumstances that the IRS considers exceptions to its IRA rules.

• Disability: You may be able to withdraw IRA funds if you become seriously disabled. Based on the IRS definition, this means you can't do any substantial gainful activity because of a physical or mental condition. You may also qualify for this exception if a doctor determines the condition can result in death or last indefinitely.
• Education: Qualified higher-education expenses include tuition, fees, books and supplies. These can be for yourself, your spouse, or the children or grandchildren of you or your spouse. Room and board are qualified expenses if the person is at least a half-time student.
• First-time homebuying: IRA account holders who are buying a home for the first time can use up to $10,000 to buy, build or rebuild a home. The IRS defines a first-time homebuyer as someone who hasn't had a present interest in a main home for the previous two years.
• Some healthcare costs: Typically, you can use IRA funds to cover unreimbursed medical expenses. Withdrawals that qualify aren't more than the amount of those medical expenses during the year of the distribution, minus 7.5% of your adjusted gross income that year. You may also qualify for an exception if you pay medical insurance premiums for yourself, your spouse and your dependents after losing a job.
• Changing accounts: You can usually roll over distributions to another IRA or qualified retirement plan within 60 days.
• Having a child: The IRS allows withdrawals of up to $5,000 to pay for birth or adoption expenses.
• Disaster: You may be able to take a qualified disaster distribution because you sustain economic losses due to a qualified disaster.

Differing IRA withdrawal rules

Roth IRAs are subject to some rules that are different from traditional IRAs. For example, contributions to Roth IRAs are always made with after-tax dollars, and you can withdraw those contributions tax- and penalty-free any time.

Other stipulations apply to the earnings on a Roth IRA, however. Distributions aren't subject to taxes or a penalty if you've had the account for five years and meet one of three conditions—you're 59 1/2 or older, you're disabled, or you're taking out up to $10,000 for a first home. In addition, you can keep money in a Roth IRA for as long as you wish—there are no RMDs.

Keep in mind that IRA withdrawal rules vary for Roth conversions, SEP IRAs and SIMPLE IRAs. A financial advisor can help you navigate the ins and outs of accessing the savings you've built up in these advantageous retirement accounts.