28 Apr How Do I Withdraw Money out Of My Traditional IRA?
How Do I Withdraw Money out of My Traditional IRA?
So you’re thinking about withdrawing money out of your traditional IRA because you need some cash … but you’re not sure how to go about doing it. Or, you’re not sure if it’s a good idea, right? It’s not unusual to consider withdrawing money out of your traditional IRA when money is tight, and you feel like you have no other options. Lots of people think about doing this. So let’s talk about how to withdraw money from your IRA and discuss whether you should or shouldn’t.
It’s Simple … and Complex
Taking money out of your traditional IRA is similar to taking money out of a 401(k) plan. And it’s actually fairly simple: you just contact the institution that holds your account, tell them you want to withdraw money out of your traditional IRA, and sign on the dotted line. However, it can become complex if you don’t fully understand the penalties and taxes as well as the long-term effects of this decision before you make it.
IRA Facts
First, let’s make sure you’re clear on what an IRA is: it’s an Individual Retirement Account. You can deposit pre-tax, tax-deferred income toward investments to prepare for retirement; taxes aren’t paid until money is withdrawn from the account. Because you don’t pay taxes until you withdraw funds during retirement, your invested funds can grow more quickly than a taxable account, allowing you to save even more for your retirement years.
As always, there are rules. You can withdraw money out of your traditional IRA anytime, but not without paying a 10% penalty if you’re under the age of 59.5. Additionally, since you can deposit untaxed money into your traditional IRA, you must pay income taxes on the money when you take it out because the government sees this as earned income. Uncle Sam is going to get his cut one way or another, no matter what your age! Whichever income tax rate you are at when you withdraw your IRA funds is the same tax rate you’ll pay on those withdrawn funds.
Best Time to Withdraw Money from Your IRA
Without question, the best time to withdraw money out of your traditional individual retirement account is after the age of 59.5. After this age, you avoid paying the 10% early withdrawal penalty and only have to pay taxes on your distribution amounts.
If you have other sources of income during your retirement years (like a pension, 401(k), social security, etc.) then you may be able to put off having to withdraw money from your traditional IRA, allowing it to continue to compound over time. However, most IRAs require you to begin distributing funds by at least the age of 70.5. This is called Required Minimum Distributions (RMD), and it varies based on a formula that takes your age and account balance into consideration. If you don’t comply with the RMD, you could face penalties, too, so be sure you fully understand the guidelines and what’s expected of you.
If you’re over the age of 59.5, and your income is low, then you may not have to pay any taxes at all on distributions from your traditional IRA. Consult your financial adviser for more details on this possibility.
Finally, if you’ve inherited a traditional IRA, you’ll need to contact the administrator of the account to find out what the rules are regarding distributions, age requirements, taxes, and penalties.
IRAs Are Protected against Bankruptcy
If you’re drowning in debt and see no other way to lessen the burden than to withdraw money out of your traditional IRA, then it’s important for you to know that while your money is in your IRA, creditors can’t get to it. So, it may be more advantageous to leave your money safely in your IRA instead of withdrawing it.
Along those same lines, if bankruptcy isn’t looming, but you have creditors knocking on your door, depending on your state laws, the money in your IRA can be protected from those creditors as well.
Special Circumstances to Avoid the 10% Penalty
Thankfully, there are a few situations that allow you to withdraw money out of your traditional IRA without paying the 10% early distribution penalty (but you still pay income taxes, of course). These include:
> Buying a Home – You can take money out of your IRA penalty-free if you’re purchasing your first home (first home means you haven’t owned a home in the past two years). Up to $10,000 is allowed, and you can even help an immediate family member buy a home with this method.
> College Expenses – Certain university costs can be covered with your IRA funds, including tuition, books, supplies, room, and board. This applies to you, your spouse, and other close family members.
> Medical Expenses – In some cases, funds from your IRA can be used to cover a portion of your or your family members’ medical insurance premiums and/or medical expenses while you’re unemployed.
> Military Members – Although there are specific timing guidelines for this option, people who are on active duty can withdraw money out of their traditional IRA to help cover costs of living or other necessities.
> Disability – If you are totally and completely disabled, you can often dip into your traditional IRA to help pay your bills and cover other expenses. Be sure to check your particular policy for details on this option.
Conclusion
Traditional IRAs are just one of many kinds of retirement accounts that you can consider when planning for your retirement. But as you can see, deciding when to withdraw money out of your traditional IRA can vary depending on your retirement goals, your age, and your financial situation. The bottom line is this: withdrawing money out of your IRA may be a good solution in the long run, but it will affect how much money you end up with during retirement. So be sure to fully weigh the pros and cons of this decision.
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