Investing Retirement Planning IRAs Taking Money Out of an IRA The Process and Consequences of Moving Money From Your IRA By Dana Anspach Dana Anspach Twitter Dana Anspach is a Certified Financial Planner and an expert on investing and retirement planning. She is the founder and CEO of Sensible Money, a fee-only financial planning and investment firm. learn about our editorial policies Updated on October 15, 2021 Reviewed by Andy Smith In This Article View All In This Article IRA Investment Decisions When Can You Take Money Out? How Much You Pay in Taxes IRA Withdrawal Mistakes to Avoid The Best Time to Take Money Out IRA Withdrawal Requirements Frequently Asked Questions (FAQs) Photo: The Balance / Julie Bang Taking money out of an IRA is as easy as calling the financial institution where your IRA account is held, telling it that you would like to take money out, and signing the appropriate paperwork. But the process and potential tax and penalty consequences require thoughtful consideration to make informed decisions on IRA withdrawal. Cornerstone IRA Investment Decisions It may be necessary to direct your financial institution as to which assets in your IRA to sell, depending on how your IRA funds are invested. For example, if you own mutual funds or stocks and bonds in your IRA and are cashing in the entire IRA, then you would sell everything in the IRA. If you only need some of the money in your IRA, you may be asked to decide which mutual funds, stocks, or bonds to sell. If you're not planning to spend the money, but instead want to move your IRA to another brokerage, you can transfer it from an IRA at one institution to an IRA at another institution. With a transfer, the funds are never really taken out of an IRA; instead, you are moving the IRA money from one IRA account to another. IRA transfers are not subject to income taxes or penalty taxes, provided you follow IRS rules for governing the transfer. When Can You Take Money Out of an IRA? You can take money out of an IRA anytime. But taking money out of an IRA prior to reaching age 59 1/2 and failure to meet certain IRS exceptions will result in a 10 % penalty tax on the amount withdrawn. Additionally, traditional IRA distributions exist as taxable income. Any disbursement by your brokerage will be reported to the IRS within the tax year when it was disbursed, so it's important to remember to claim it as income when you file your annual tax return as well. Note It’s not a matter of when you can take money out of an IRA, it’s a matter of how much in taxes and penalties you’ll pay if you take money out of your IRA at the wrong time. How Much You Pay in Taxes on IRA Withdrawals Any money withdrawn from a traditional IRA becomes taxable income in the year it is withdrawn. The amount of taxes you will pay depends on your marginal tax rate that year, which depends on your total other income and deductions. If you have no other income in the year you take an IRA withdrawal, and you have sufficient deductions, it is possible to avoid paying any taxes at all. IRA Withdrawal Mistakes to Avoid Mounting debt can be scary. Crushing debt can be terrifying. Taking money out of an IRA may seem like your only option to ease the ever-growing worry, but think carefully before using this option. Even if your immediate financial burdens compound, IRA money is protected with certain limitations from creditors in the case of bankruptcy. Taking money out of your IRA cripples the valuable creditor protection described below. Up to $1,362,800 of Traditional or Roth IRA money may be protected from bankruptcy claims under federal law if you contributed directly to the account, which means that this protection may not be extended to an IRA account that you inherited, for new bankruptcy filings between April 1, 2019, and March 31, 2022. (This figure is inflation-adjusted every three years.) The entire IRA account balance is protected if the money was rolled over to an IRA from a company plan (such as a 401(k) or 403(b) plan). IRA assets may be sheltered from creditor claims other than in bankruptcy. Laws vary widely from state to state. Note It is always best to check with an attorney in your state about which assets creditors can go after. Rules vary by state. The Best Time to Take Money Out of an IRA As the name implies, the best time to take money out of an IRA complies with a smart withdrawal plan. A smart, comprehensive withdrawal plan addresses expected annual income each year in retirement and the starting date of Social Security, considers pensions and any other sources of income, and then estimates your tax situation in retirement. All information combines to decide in which years larger or smaller IRA withdrawals should be taken. When Are You Required to Take Money Out of an IRA? For a traditional IRA (not a Roth IRA) withdrawals called required minimum distributions must be taken soon after reaching the age of 72 (or age 70 1/2 if you turned 70 1/2 before January 1, 2020). The required withdrawal amount is determined by a formula that is recalculated each year, based on age and prior year-end account balance. Taking Money Out of a Roth IRA The rules discussed above apply to traditional IRAs where you made deductible contributions. Withdrawals from Roth IRAs are similar but fall under a different set of tax rules. Frequently Asked Questions (FAQs) How does taking money out of your IRA affect your credit score? Your credit score is a measure of how well you manage debt, so IRAs don't impact the score one way or another. Having money in an IRA won't improve your credit score, and taking money out won't hurt it. How do you pay the penalty for taking money out of your IRA? If you need to pay penalty taxes on early IRA withdrawals, then you can settle that liability whenever you want, as long as it's done before Tax Day. You can choose to have the taxes taken out of the initial distribution, or you can wait until later and pay the IRS separately. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Fidelity. "IRA Withdrawals." IRS. "Rollovers of Retirement Plan and IRA Distributions." IRS. "Hardships, Early Withdrawals and Loans." IRS. "Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs) for Use in Preparing 2019 Returns," Page 14. EveryCRSReport.com. "The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” S. 256, in the 109th Congress," Page 7. Financial Planning Association. "Creditor Protection for Retirement Accounts: ERISA, the Supreme Court, and the Bankruptcy Act of 2005," Page 1. IRS. "Publication 590-B (2019), Distributions From Individual Retirement Arrangements (IRAs)." IRS. "Retirement Topics — Required Minimum Distributions (RMDs)." IRS. "Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs) for Use in Preparing 2019 Returns," Page 28.