IRA distribution guidelines

An IRA is a powerful tool that allows you to save for retirement. The tax-deferred or tax-free status of your IRA provides an incentive to keep your funds invested. Withdrawing from your IRA may subject you to taxes and penalties depending on your age, type of IRA, and how long your account has been funded.  

 

Traditional IRA 

Since Traditional IRAs are tax-deferred, income tax will always be owed on withdrawals. This includes withdrawals of contributions and of any potential gains. 

In addition to income tax, an early withdrawal penalty may also be owed if you are younger than age 59½. Common exceptions to this penalty include qualified higher education expenses, qualified first-time home buyer, and an excess contribution removal prior to the extended tax deadline. Disability and death of an account owner also qualify as exceptions to the early withdrawal penalty.  

Required minimum distributions (RMDs) must begin by April 1 of the year following the calendar year in which you turn 72*. In subsequent calendar years, your RMD amount must be withdrawn by December 31st. Failure to withdraw your RMD may result in an IRS penalty of up to 50% of the RMD amount.   

  

Roth IRA 

Roth IRAs are funded with post-tax funds, meaning you’ve already paid income tax on these contributions. As a result, contributions to Roth IRAs can be withdrawn at any time, tax and penalty free.   

To avoid paying taxes or early withdrawal penalties on the gains in your account, the withdrawal must be considered Qualified. Typically, this means that the account has been funded for at least five years and that you are older than age 59½, have a disability, or that you qualify for an exception. 

Unlike Traditional and SEP IRAs, there are no required minimum distributions (RMDs) from a Roth IRA, given that you are the original account owner.  

  

SEP IRA 

SEP IRAs have similar withdrawal rules to Traditional IRAs, and income tax is owed on any withdrawal from this type of IRA.  

An early withdrawal penalty of 10% may also be assessed for withdrawals that occur prior to age 59½, although some exceptions to this penalty may apply. 

Required minimum distributions are also mandatory from SEP IRAs beginning by April 1 of the year following the calendar year in which you turn 72*. The penalty for not withdrawing your RMD amount on an annual basis may be up to 50% of the RMD amount. 

 

 

If you decide to withdraw from your IRA, we recommend reviewing M1’s list of distribution reasons prior to withdrawing from your IRA to ensure that you are choosing the correct reason. Additionally, we encourage you to consult a qualified tax professional if you have any further questions about potential taxes or penalties owed on your withdrawal. 

 

*If you were born prior to July 1, 1949, RMDs must have begun by April 1 of the year following the calendar year in which you turned 70½. 

 

M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. 

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