IRA taxes, IRA penalties and IRA distributions are what IRA law covers. You do not have to be an attorney to understand the basics of IRA law. If you make an IRA distribution from a Traditional IRA too early, you will have to pay taxes and penalties, that’s the law.
IRA’s were established to help individuals save for their own retirement. The IRS uses taxes and penalties as a deterrent to using your Traditional IRA investment account for anything other than your retirement.
Your IRA investment account is not to be used as an account that you make frequent withdrawals from to pay everyday expenses; open a savings account for that.
Your IRA account is for your retirement, period!! Let’s highlight the rules and regulations of Traditional IRA’s. Roth IRA’s and Simple IRA’s have slightly different rules, we will just be focusing on Traditional IRA’s.
Traditional IRA’s Rules and Regulations:
Traditional IRA Distributions:
- Traditional IRA distributions are sometimes referred t as withdrawals.
- Distributions or withdrawals can begin at age 59 1/2.
- Minimum distributions must begin once you reach age 70 1/2.
Traditional IRA Taxes:
- Withdrawals before age 59 1/2 from a Traditional IRA are taxed as ordinary income.
- Withdrawals after age 59 1/2 are taxed as ordinary income.
- Taxes will have to be also be paid on the earnings in the account.
- You will pay a 50% excise tax if minimum distributions are not started by April 1st of the year after you reach age 70 1/2.
- The 50% excise tax is on the difference between what you did withdraw and what you should have withdrawn.
Traditional IRA Penalties:
- Withdrawals before age 59 1/2 will incur a 10% early withdrawal penalty.
- The IRS does make a few allowances.
- If you meet one of the following criteria, even though you are under 59 1/2, you can avoid paying the 10% penalty.
How to avoid the Traditional IRA penalty:
- Death of the IRA owner. The estate does not incur the 10% IRA penalty
- Disability. If the IRA owner becomes permanently disabled.
- To pay for Medical expenses that are unreimbursed.
- You can withdraw up to $10,000 to pay for the expenses of buying your first home.
- Higher education expenses.
The IRS established IRA’s to help with retirement planning, but they do understand that sometimes emergencies come up where individuals have no other options but to use their IRA’s as a source of funds.
You will avoid the IRA penalties with the exceptions listed above, but you will not avoid the taxes on a Traditional IRA. The monies invested in a Traditional IRA have never been taxed. So at withdrawal, the IRS needs to ge their money.