An IRA withdrawal is when you take money out of your individual retirement account (IRA). You’re allowed to take IRA withdrawals at any time, for any reason. However, as with 401(k) withdrawals, you may be penalized if you take a distribution before age 59 ½.
IRA withdrawal rules differ somewhat depending on whether you have a traditional IRA (funded with pre-tax money) or a Roth IRA (funded with after-tax money).In this article, we’ll break down how IRA withdrawals work. You’ll learn the rules, the differences between taking distributions from a 401(k) vs. IRA, whether IRA loans are allowed, and more.
Learn more: What is an IRA, and how does it work?
Traditional IRA contributions are often tax-deductible, but you owe ordinary income taxes on any withdrawals. If you take money out of the account before age 59 ½, you’ll typically pay income taxes and a 10% penalty on the amount you withdraw.
Eventually, you’ll need to take mandatory withdrawals, called required minimum distributions (RMDs), from your traditional IRA. The RMD age increased to 73 (from 72) under the Secure Act 2.0, a piece of legislation that former President Joe Biden signed into law in late 2022. The law will increase the RMD age to 75 in 2033.
Learn more: Traditional IRA vs. Roth IRA: How to pick the right one
Roth IRAs are always funded with money you’ve paid taxes on. Withdrawals are tax- and penalty-free as long as you’re at least 59 ½ and the account is at least 5 years old.
However, Roth IRAs afford you more flexibility than a traditional IRA. If you limit your withdrawals to money you’ve contributed to the account, you won’t owe taxes or penalties on the distribution. But if your withdrawal includes any of the account’s earnings, you’ll owe taxes and penalties on the earnings part of the withdrawal.
The IRS treats money you withdraw from a Roth IRA as coming out of the account in this order:
Contributions: You can withdraw up to the amount you’ve contributed tax- and penalty-free, no matter how old you are or when you opened your Roth IRA.
Rollover and converted amounts: You’re allowed to roll over or convert a traditional IRA into a Roth IRA, provided that you pay taxes on the amount you convert. Rollover and converted Roth IRA contributions come out after regular contributions on a first-in, first-out basis, meaning you withdraw the oldest converted contributions. The timing of the contributions matters because you’ll owe a penalty if you withdraw converted funds if you don’t keep the money in your Roth IRA for at least five years.
Earnings: The money your contributions have earned comes out last when you make a Roth IRA withdrawal.
Unlike traditional IRAs, Roth IRAs don’t have mandatory withdrawals while the original account holder is still living. That makes them a popular tool for transferring wealth to beneficiaries. But if you inherit an IRA with a Roth tax structure, you’ll eventually be required to take distributions. Because the rules are complex, consult with a tax professional in this situation.
Learn more: These are the traditional IRA and Roth IRA limits
There are several situations when you can avoid the 10% early withdrawal penalty that often applies to IRA distributions before age 59 ½, including:
You’re withdrawing up to $5,000 for expenses related to the birth or adoption of a child
You become totally and permanently disabled
You’re withdrawing up to $22,000 after suffering financial losses from a federally declared disaster
You’re a domestic violence survivor who’s withdrawing up to $10,000 or 50% of your IRA balance
You’re withdrawing up to $1,000 for an emergency personal expense
You’re a first-time home buyer withdrawing up to $10,000
See the IRS’s full list here.
Note that the above scenarios may help you avoid the 10% early withdrawal penalty, but you may still owe income taxes on the IRA distribution. To assess the impact of an IRA withdrawal, consider consulting with a financial advisor.
One big difference between a 401(k) and an IRA is that many 401(k) plans allow you to borrow money from your account and repay it with interest, but IRA loans are prohibited. Under IRS rules, if you borrow money from an IRA, the account is no longer considered an IRA. The account loses its tax-advantaged status, and the entire balance will be included in your taxable income for the year.
Learn more: What is a 401(k)? A guide to the rules and how it works.
However, the IRS does allow what’s known as a 60-day IRA rollover. If you withdraw money from your IRA and then deposit it into another IRA or retirement account, you can avoid the typical taxes and penalties that would apply to a distribution. This is known as a nontaxable rollover, and you’re only allowed one in any 12-month period.
In that sense, a 60-day rollover can be similar to an IRA loan — but if you’re going this route, make sure you’re confident that you can re-deposit the funds within the required timeframe. Otherwise, you could be liable for a big tax bill.
Read more: Retirement planning: A step-by-step guide
Yes, you can withdraw money from a Roth IRA before you reach age 59 ½, and you can even avoid income taxes and a 10% early withdrawal penalty if you limit your withdrawal to the amount you’ve contributed. However, if your withdrawal exceeds your contributions, you’ll owe taxes and penalties on the earnings portion if you’re younger than 59 ½. Once you’re 59 ½ and you’ve had your Roth IRA for at least five years, withdrawals are tax- and penalty-free.
No, IRS rules prohibit borrowing from an IRA. If you take an IRA loan, the account ceases to be an IRA, and the full amount will be included in your taxable income. However, you’re allowed to take money out of an IRA and then redeposit it into another IRA within 60 days without it counting as a distribution.
You’ll owe income taxes on withdrawals from a traditional IRA because the account is funded on a pre-tax basis. You can avoid taxes on a Roth IRA withdrawal if you limit the distribution to the amount you’ve contributed, or if you wait until you’re age 59 ½ and have held the account for at least five years. You can avoid the additional 10% tax penalty on early withdrawals from a traditional or Roth IRA if you qualify for an exception — if you have large, unreimbursed medical expenses or you experienced financial losses due to a disaster, for example.
Tim Manni edited this article.
