As you near retirement, it will be good for you to know the IRA withdrawal rules, especially if you plan on retiring early.
There will be taxes, and in some cases penalties to consider. If you plan to retire before age 59 1/2, you might want to tap 401k savings if you have them, instead of your IRA to avoid paying early withdrawal penalties.
If you don't have a 401k account and you plan to retire before age 59 1/2, you should plan to cover those years with regular savings until you can withdraw from your retirement accounts without paying penalties.
Knowing this in advance means you can prepare for it.
When you take traditional IRA withdrawals, this money is counted as taxable income in the year you take the withdrawal.
But if any of your original IRA contributions were not deducted from your income because they exceeded allowable deductions, those amounts are not taxed again.
In other words, if you weren’t allowed a tax deduction in the year you made the contribution, you won’t have to pay taxes when you withdraw it - it was already taxed.
Any earnings on the contributions that are withdrawn are taxable, however.
If you withdraw from your IRA before age 59 1/2, you’ll also pay early withdrawal penalties in addition to regular income tax, in the amount of 10% of the withdrawal.
Contributions to ROTH IRAs were made with after-tax dollars.
Withdrawals from ROTH IRAs are treated the same as traditional IRAs. The difference is that more of the money in ROTH accounts have already been taxed, so only the earnings are taxable at withdrawal time.
Although early ROTH withdrawals are not taxable since tax was already paid, early withdrawals are still subject to the 10% early withdrawal penalty.
And as above, any earnings will be taxed.
After reaching age 70 1/2, the required minimum distribution rules go into effect. These (RMD) rules require that each year a certain minimum amount be withdrawn from any and all retirement accounts, and taxes paid. If the minimum amounts are not withdrawn on time, there are penalties to pay, too.
ROTH IRAs are not subject to this minimum withdrawal rule, except when they are inherited.
These RMD rules apply to each account separately. This means you cannot satisfy the minimum withdrawal for one account by taking funds from a different account.
Also, you cannot carry over withdrawals to satisfy RMD amounts. This means if you withdrew extra last year, you still cannot apply it towards this year's required minimum distribution.
Congratulations on taking the time to learn all you can about retirement topics.
If you're planning to retire early, you should remember one key difference between IRA accounts and 401k accounts, and that is that you can retire at age 55 and take withdrawals without penalty from a 401k account, but you cannot do the same from an IRA.
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