IRA Withdrawal Rules

Saving for retirement is one of the basic priorities with everyone. The earlier one begins to save, more is the post-retirement benefit. There are numerous financial options available in which to save retirement money. Individual Retirement Account (IRA) is one among them.

IRA is a tax free account and within its oeuvre, there are several other financial options to suit individual needs. One thing that pre-occupies account holders is withdrawal terms. Not all can understand clearly rules and regulations, despite being properly manifested. A clear view of IRA withdrawal will guide in future investments.

Suppose you have a regular IRA account, therefore, what are the clauses one needs to be aware of for withdrawal? The IRA withdrawal rules differ with the type of account created but, there are some commonalities. Process of withdrawing from IRA begins after reaching 59.5 years of age. Regular income tax rates are applied at the time of withdrawal. Note that withdrawing before reaching 59.5 age means paying 10% early distribution penalty tax to the government.

However, there is provision for penalty tax exemption if the account holder (or the beneficiary, in case of death) cites one these 7 major reasons- death of account-holder, medical expense deduction, to pay higher qualification expenses, to purchase qualified 'first-home', begin paying equal periodic payments, account holder becomes disabled, and if related with Qualified Domestic Relations Order (QDRO).

Except for these reasons, financial experts comment against early IRA withdrawal. Not only does it hamper future growth prospects but limits post-retirement financial security. Youngsters starting IRA must dissuade themselves from IRA early withdrawal as they lose thousands of dollars in tax benefit.

The IRA account holder needs to begin receiving distributions before reaching the age of 70.5. In other words, upon reaching the qualified age, the IRA holder has time between 59.5 - 70.5 to receive payments. If there is any delay or postponement in IRA withdrawal, additional penalty is charged. To avoid this, withdraw at least the Required Minimum Distribution (RMD). Failing to withdraw RMD, the penalty entails 50% tax calculated on the basis of the difference between the actual amount for distribution and the actual withdrawn amount.

Difference between Traditional IRA and Roth IRA

The Roth IRA came into existence in 1997 to the benefit of numerous middle class Americans. Unlike traditional IRAs, Roth IRA rules were more flexible. Firstly, they are non-tax deductible source of income. Secondly, no penalty tax is slapped on the account holder if withdrawing early IRA. Any amount could be withdrawn, tax was levied only on the interest earned on the withdrawn amount. Thirdly, amount contributed and amount earned, both can be withdrawn after completion of 5 years without paying any tax or penalty.

The earning limit for Roth IRA single status account holder is $95,000 per year and $150,000 for joint account holders. Selecting Roth account can be tricky. Better to use professional services of a financial planner for guidance. Owing to the benefit of Roth IRA, one can rollover IRA withdrawal of traditional account into new Roth IRA to enjoy better financial benefits.

IRA is an essential financial instrument tool to secure future financial problems.