The Internal Revenue Service’s (IRS) rules on Individual Retirement Account (IRA) distributions can essentially be broken down into 3 categories: early withdrawals from an IRA, optional distributions from an IRA, and required distributions from IRAs.
IRS rules for early withdrawals from an IRA
Early withdrawals are withdrawals made by the owner of an IRA before the owner reaches age 59 1/2. While an IRA owner is legally permitted to make withdrawals from an IRA at any time, early withdrawals are generally subject to a tax penalty equal to 10 percent of the early withdrawal. A number of exceptions to the 10 percent penalty exist. Among the more common exceptions are:
*Withdrawals to pay health insurance premiums by an unemployed IRA owner
*Withdrawals of $10,000 or less to purchase a first home
*Withdrawals to pay for qualified educational expenses for the IRA owner, the IRA owner’s children, and the IRA owner’s grandchildren
*Withdrawals to refund current tax year contributions to an IRA as long as the withdrawal occurs before the due date of the IRA owner’s tax return.
If the IRA owner satisfies the requirements for one of the exceptions, then the IRA owner will not be subject to the 10 percent penalty for that early withdrawal.
IRS rules for permitted withdrawals
IRA owners between the ages of 59 ½ and 70 ½ may make withdrawals from their IRA without penalty. These owners may withdraw any amount that they desire from their IRA. They also may choose not to make any withdrawals during this time period.
IRS rules for mandatory withdrawals for IRA owners
IRA owners must begin taking withdrawals from their IRA beginning with the year in which the owner turns 70 ½. The IRA owner must take the first required distribution from his IRA no later than April 1 of the year following the year in which he turned 70 ½. Required distributions must be taken at least annually, but can be taken more frequently. After the initial distribution, required annual distributions must be taken by December 31 of each year.
The amount of a required distribution depends upon the IRA owner’s age, the balance in the IRA account, and whether the IRA owner’s spouse is more than 10 years younger than the owner. The IRS publishes 2 separate tables for owners to use in calculating the amount of their required distribution. Table II is used if the IRA owner is married, his spouse is more than 10 years younger, and the spouse is the sole beneficiary of the IRA. Otherwise, the IRA owner is required to use table III in calculating the required distribution.
To calculate the required minimum distribution, the IRA owner needs the IRA balance as of December 31 of the previous year. The owner then finds the appropriate distribution period from either table II or table III. To compute the required annual distribution, the owner divides the IRA balance as of December 31 of the prior year by the distribution period obtained from table II or table III. The result is the amount of the IRA owner’s required minimum distribution for that tax year.
IRS rules for mandatory withdrawals for IRA beneficiaries
The IRS rules for mandatory distributions to beneficiaries are somewhat more complicated. The simplest rule is for a surviving spouse. The surviving spouse may elect to assume the role of IRA owner and be governed by the rules relating to distributions to IRA owners. If the beneficiary is not an individual, then the beneficiary must take full distribution of the entire balance of the IRA within 5 years of the owner’s death. An individual beneficiary may elect to take distribution of the entire amount in the IRA within 5 years of the owner’s death. If an individual beneficiary elects to take required distributions in installments rather than as a lump sum, the individual beneficiary will usually use table 1 to calculate the amount of the required distribution. The calculation for the required distribution amount is the same as the calculation for an owner’s required distribution amount.
Roth IRA withdrawal rules
Roth IRAs are exempt from the IRS’s required distribution rules. Roth IRAs are, however, subject to the 10 percent early withdrawal penalty for withdrawals made before age 59 ½.