IRA Withdrawals

You hear quite a bit about saving and investing for retirement, but when do you actually get to use the money? When you have a traditional IRA, the questions around taxes, penalties, limits, and requirements can become complex. Here, we'll walk through the various considerations that might arise when you're thinking of tapping your IRA early or at all.

Rules for IRA withdrawals

Rules for IRA withdrawals

You have the option, but not the obligation, to take from your IRA without penalty once you've turned 59 1/2, assuming you don't qualify for any listed exceptions. Again, you are not required to do this, but if you need the money in retirement, it's all yours without penalty. In all likelihood, you'll owe taxes on the withdrawals from a traditional IRA.

Mandatory withdrawals

Mandatory withdrawals

You won't be required to take money out of your IRA until you turn 73, which is when mandatory withdrawals, called required minimum distributions, or RMDs, begin. The RMD age used to be 70 1/2, but the original SECURE Act of 2019 pushed it back to 72. The Secure Act 2.0, which became law in late 2022, raised the RMD age to 73. The RMD age will increase again to 75 in 2033.

As mentioned previously, required minimum distributions take effect only later in life. For your first RMD, you will need to withdraw a pre-specified amount by April 1 of the year after you turn 73. Thereafter, all RMDs will be due by December 31 of each year.

Note that your RMD, when it comes time to withdraw it, is a minimum amount. You do have the option to take more if you need it. But keep in mind when you plan your retirement withdrawal strategy that this will mean more taxable income in the year you take the distribution. The RMD is intended to create a smoothing effect in terms of the income your account generates, as well as the tax revenue the government receives. This is all based on your life expectancy.

Note that RMDs don't apply to Roth IRAs. You're never required to take money out of a Roth account during your lifetime.

The 60-day rule

The 60-day rule

One of the riskier ways to temporarily access IRA funds without taxes or penalties -- if you really need the money -- is to attempt a 60-day IRA rollover. This IRS rule allows you to take money out of your traditional IRA and use it for any reason as long as you return the full amount before the end of 60 days. You're allowed to do this once per 12-month period.

Unless it's a real emergency, or you're 100% sure you will have the funds available (pre-withholding) to redeposit to your IRA, it's best to avoid the 60-day rollover. Missing the 60-day window or failing to repay the money at all will result in taxes and penalties on the entire amount distributed. Given the opportunity cost of losing tax-deferred growth, plus the unnecessary expenses, it's usually not worthwhile to do this.

Other special circumstances

Other special circumstances

Both traditional IRA and Roth IRA owners are eligible to withdraw up to $10,000 to assist in the purchase of their first home. Note that if two spouses are buying a home together, each is eligible to withdraw up to $10,000 for a total of $20,000. However, while this amount would be distributed penalty-free, the account owners would still owe income tax on the amount withdrawn. 

There are a few circumstances apart from buying a home that qualify for hardship withdrawals, which can often avoid the 10% penalty that typically applies to early retirement withdrawals. However, you'll still be responsible for any applicable income taxes. Expenses that qualify as hardship withdrawals are true emergencies or unusual circumstances, such as:

• Unreimbursed medical expenses over 7.5%.
• Qualified education expenses.
• Qualified expenses if you're a military reservist called to active duty.

If you're thinking of taking from your IRA, think about whether your expenses fall into one of the big three expense categories: health, education, and housing. If they don't, and it's not a true emergency, you might consider alternative methods of covering the expenses.

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Putting it all together

Your IRA is intended for one thing: retirement. There are ways to access IRA funds early if you read the fine print and adhere to restrictive rules. In general, though, it's best to use your IRA for long-term funds that you don't immediately need and certainly not as a vehicle for borrowing or short-term liquidity. This is all to say that for best results, you should keep things simple and use these accounts for their intended purposes.

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