IRA Withdrawals

A withdrawal from IRA must follow specific rules that vary depending on the type of IRA in question. An IRA, or Individual Retirement Account, is one method of saving money to be used after retirement; such accounts allow individuals to save money pre-tax, thus reducing their current taxable income. There are several different types of IRA investments including a traditional, ROTH, SEP, Simple and SARSEP plans.

General Guidelines

IRA-based plans are designed for individuals to use for their retirement after age 60. Money can be withdrawn from these accounts at any age, but the amount withdrawn will be taxable as income. If money is taken out of an IRA before the individual is 59 ½, there may be an additional 10% tax beyond the income tax. A Simple IRA plan will have an additional 25% tax charged if money is withdrawn in the first two years of the plan. For example, if an individual starts to participate in a Simple IRA at the age of 25 and then needs to withdraw $1000 at the age of 26 ½ the $1000 will be taxed at 25%, regardless of their tax bracket. Money withdrawn from an IRA after the age of 59 ½ is tax-free. Once a participant reaches the age of 70 ½ the IRA must distribute a minimum amount annually. This amount varies according to the life-expectancy of the individual and how much money is in the account.

Roth IRA

A ROTH IRA is different from a traditional IRA in that the contributions made are not tax-deductible. Contributions can continue to be made into the account after the age of 70 ½ and funds can remain in the account for as long as the holder lives. Money may be withdrawn from a ROTH IRA without penalty after the individual has participated in the plan for 5 years and the withdrawal being made meets one of the following four criteria: the participant is over the age of 59 ½; the money is being used to buy or rebuild a first home; the money is needed due to a disability; the money is being paid to a beneficiary or estate after the plan owner has died. Any distributions that do not meet one of these criteria will be subject to tax and possibly an additional 10% penalty tax.

Traditional and SIMPLE

A SIMPLE or Savings Incentive Match Plan for Employees generally has the same rules for withdrawal of funds that a traditional IRA uses. The participant can withdraw at any time, subject to taxes, before the age of 59 ½. Additional taxes will be levied for monies withdrawn before the age of 59 ½.

SEP and SARSEP

SARSEP stands for Salary Reduction Simplified Employee Plan. This is a type of retirement plan used prior to 1997 and is no longer available. If a plan was started before 1996 it may still be used, but no new plans can be started. A SARSEP plan used a SEP IRA, and all rules regarding withdrawals from a SEP apply to a SARSEP. Current employers may use a SEP or Simplified Employee Pension. This type of plan allows the employee to make regular contributions to an IRA through income reduction. These contributions are tax-free at the time of the contribution. As with traditional IRA programs, all funds withdrawn prior to the age of 59 ½ are taxed and may be subject to an additional 10% tax. There are, however, special circumstances where participants in any IRA may withdraw funds.

Special Circumstances

Money can be withdrawn from an IRA at any time, though there may be taxes on the amount withdrawn. Sometimes special circumstances can occur that would allow these taxes to be waived. These include withdrawals for higher education expenses or to pay for a first home. Another special circumstance is in the case of a hurricane or natural disaster. The individual must live in the designated disaster area and cannot withdraw more than $100,000 from the IRA.

IRA's are a vital method for individuals to save for retirement. There are plans available for individuals who are self-employed as well as those employed by small and large companies. It is important to follow all applicable laws when reporting withdrawals from any IRA for any reason. This precaution will help avoid tax penalties and fees that may be assessed as the result of an audit.