Individual Retirement Account IRA Rules

General Information on IRAs

An individual retirement account IRA is a type of retirement savings account that receives special tax treatment by allowing for reductions in taxable income by the amount contributed, up to certain limits specified by the IRS.

IRA accounts can be established at banks, investment brokerage companies, like Etrade, for example, and at larger financial services companies, such as Fidelity, Vanguard, TIAA-CREF, and many others.

Below is an example of the IRA contribution limits for 2012, from the IRS website.

To get current contribution limits, go to and search for IRA limits or similar terms.

IRS rules for IRAs

Tax Information on the Traditional IRA

The definitive source for tax and penalty information about individual retirement account ira rules is the IRS, and you can verify the information you read here or on other websites by visiting the website and searching on IRA.

Besides the rules defined by the IRS for individual retirement arrangements, each plan setup by a financial organization may have its own restrictions on how you use their individual retirement account product.

These will be things like how you can transfer your funds, or how much you will be charged for that function.

This section is about the tax rules for IRA type accounts as opposed to 401k accounts, for example.

The most pertinent rules of interest to real people preparing for retirement are given here (individual retirement account ira).

Individual Retirement Account IRA Rules for Age 59 1/2

You can begin withdrawing from your IRA without paying the 10% penalty once you reach age 59 1/2. Prior to that time, you will pay income taxes and the 10% penalty which could be 30%.

Tip: If you opt for paying the extra 10%, think of this as a LOSS or a charge for doing the wrong thing. NEVER EVER cash out a retirement savings account except for use as retirement income!

After age 59 1/2, you will still pay income taxes on the withdrawals of income that were never before taxed. Any contributions that you already paid taxes on are exempt from income tax after retirement. Interest earnings on the investments are taxable, too.

Typically after age 59 1/2 if you withdraw from your retirement accounts, YOU SHOULD BE RETIRED and your income will be lower.

Tip: If you are still working and withdraw from your retirement accounts, it is a bad idea unless you are semi-retired and you are using income first and retirement money second and you planned really well for this AND have plenty of savings.

Once you are retired and using your IRA as intended, you have options for adjusting the amount of taxes withheld from your withdrawals (unlike the 401k) just as you did from your paycheck when you were working.

Individual Retirement Account IRA Rules for Age 70 1/2

In the year you reach age 70 1/2, you can no longer contribute to an IRA for a tax deferral of income.

The year after you reach age 70 1/2 you will be required to take minimum distributions from your accounts OR you will pay a penalty for not doing so. See the website for details on Topic 451 which includes example scenarios and more specific detailed information.

If you don’t need this extra income when you reach age 70 1/2, BRAVO! But, to make the most of it, consider what type of investments (or special purchases) make the most sense for you at this time of your life.

Number one: have fun!! Splurge on yourself or yourself and your family! Buy a sports car, take a trip to Paris or Australia, throw a huge family reunion and pay for the accommodations for the people you really want to see.

You just don’t know what tomorrow will bring, so indulge once in a while if you have the means.

Hopefully, this information on individual retirement account ira rules has been helpful.

Continue browsing this site to learn more about other topics that can help you line up your retirement ducks.

The 401k rules are a little different, so be sure to look at that information if you have those accounts and plan to retire before age 59 1/2.

Life After Job Home > 401k, IRA, Others > Individual Retirement Account IRA : You are here