How to Withdraw from Your IRA with Minimal Penalties

You are permitted to withdraw from your IRA once you reach the age of 59-1/2. At that point, you will either pay a tax on your withdraw at your current tax bracket, if you have a traditional IRA, or withdraw tax free, if you have a Roth IRA. Whether or not you pay taxes on the back-end depends on whether or not you paid them on the front end. Since you contribute tax free dollars to a traditional IRA, you will owe taxes on the back end. To reduce the amount you owe, consider these scenarios.

Early Withdrawal

If you are withdrawing before the age of 59-1/2, there is nothing you can do to avoid an additional 10 percent fee on your withdrawal. This is a penalty for taking money out before the retirement age. Basically, the tax benefits of a retirement account are only given because the government wants to encourage you to actually save for retirement. If you simply spend the money, you will face this penalty for improper use of the account. You cannot borrow funds from your IRA. It is possible to borrow from a 401(k) in some scenarios, but you must put the money back in the account within a narrow window of time. Unfortunately, while an IRA is more flexible than a 401(k) in many regards, this is not one of them. Consider taking a loan against the funds instead of a withdrawal if you truly have no other options.

Withdrawals After Qualifying Age

Once you have reached the qualifying age, you will have to start taking mandatory withdrawals from the account. If you do not do this, you could again face a penalty. This is to stop wealthy individuals from simply allowing the holdings to grow tax-free indefinitely. The funds are meant to be used for retirement, and failure to use them is not acceptable according to the IRS. Thinking long-term when you set up your IRA will help reduce any taxes you will face on the funds in the future. If you know your income when you are contributing is far lower than it will be when you start withdrawing, choosing the Roth option is favorable. This will allow you to reap no tax benefits in the short-run but enjoy a large reward down the line.

Rollovers and Transfers

If you are not actually withdrawing funds from your IRA for good but only transferring them to a new account, you do not have to pay fees for an early withdrawal. In order to avoid the penalty, ensure that your funds either go straight into your new retirement account or stay in your hands for no more than 60 days. You can only rollover the funds once in any given year. If you switch from a traditional to a Roth, keep in mind you will have to pay taxes on the funds. This is a one-time tax because the funds going into the Roth are post-tax but coming from the traditional are pre-tax. Plan ahead for your tax schedule accordingly.

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