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.

CARES Act IRA withdrawal rules

As one of the landmark pieces of legislation to combat the coronavirus pandemic, the CARES Act allowed an unusually large withdrawal limit from qualifying retirement plans. During 2020, IRA owners were eligible to withdraw up to $100,000 of their IRA funds without an early withdrawal penalty.

Income tax will still be due if the full amount of withdrawal is not returned to the IRA within three years. To avoid the immediate tax sting, you have the option to spread any income tax due over three tax years, ending in 2022.

If you had a coronavirus-related hardship in 2020, you would have been eligible to withdraw up to $100,000 under the CARES Act without penalty. If you took advantage of this rule change, it's in your best interest to pay back the money if you can to reinstate the power of tax-deferred growth in your IRA. 

The CARES Act also suspended required minimum distributions (RMDs). In a typical year, people aged 72 and older would be required to take an IRS-specified amount out of their pre-tax retirement accounts. RMDs exist to ensure the IRS receives its tax revenue on a relatively predictable schedule. RMDs have since returned in 2021, so the CARES Act suspension should be viewed as truly a one-time reprieve.

Other special circumstances

Apart from the rules connected to pandemic relief, 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 would be 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while this amount would be distributed penalty-free, the account owners would still owe income tax on the amount withdrawn.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 other circumstances, apart from buying a home, that qualify as hardship withdrawals. They generally are true emergencies or unusual circumstances that necessitate taking money from your retirement account. Included in these hardships are:

  • Unreimbursed medical expenses over 7.5% of adjusted gross income, or 10% if you're younger than 65
  • 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 in one of the big three expense categories: health, education, or 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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Rules for withdrawal

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

You won't be responsible for taking money out of your IRA until you turn 72. As mentioned previously, required minimum distributions only take effect 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 72. 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.

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 worth it to do this.

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Answers to frequently asked questions

Can I withdraw money from my IRA without penalty?

Yes. You will either need to be older than 59 1/2 or fall into one of the hardship exception categories. There are also other rules, like IRS Section 72(t), that allow for early distributions when you are nearing retirement age. Note that while you can usually find a way to withdraw from an IRA early, you'll still have to pay tax on any distributions.

What are the major exceptions for early withdrawal from my IRA?

  • First-time home ownership
  • Excessive and unreimbursed medical expenses
  • Qualified education expenses 
  • Change in military status from reservist to active

What is the penalty for early withdrawal from an IRA?

The penalty for early withdrawal is 10% of the distributed amount. Note that this is levied in addition to any taxes due on the distribution.

How much tax should I withhold from my IRA withdrawal?

Commonly, 10% is withheld for federal taxes, but you do have the option to elect out of this withholding. If you opt out of federal withholding, be sure you can come up with the tax due the following April.

How can I avoid paying taxes on my IRA withdrawal?

This usually won't be an option with traditional IRAs, but there are some scenarios in which you may avoid tax. One is by successfully completing a 60-day rollover by taking money out but then returning it within 60 days. Another is by withdrawing non-deductible contributions (that is, money in your traditional IRA that has already been taxed).

Putting it all together

Your IRA is intended for one thing: retirement. No doubt 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, keep things simple and use accounts for their intended purposes.