Traditional IRA Withdrawal and Distribution Rules

Withdrawing Money From an IRA Incorrectly Can Result in Major Fees

A pile of money.
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A traditional individual retirement account (IRA) can be a great retirement savings tool, but it can also be a great tax-planning tool with some immediate tax advantages for those who qualify.

Traditional IRAs let you put money away that will grow tax-deferred until it's withdrawn. You might also be able to take a tax deduction for your annual contributions to the account based on your modified adjusted gross income (MAGI) and whether you're covered by an employer-sponsored plan.

But in exchange for these benefits, the Internal Revenue Service imposes some strict rules for withdrawals, and you can be charged with tax penalties of up to 50% if you don't follow them.

Key Takeaways

  • If you have a traditional individual retirement account (IRA), your money grows tax-deferred until you withdraw it.
  • Making withdrawals before you reach age 59 1/2 means you will incur a 10% early distribution penalty on top of any income taxes that are due, though there are some exceptions.
  • If you do not take your full required minimum distributions, the penalty is 50% of the difference between what should have been distributed and what was actually withdrawn.

Taxable Traditional IRA Withdrawals

With the exception of the recovery of previous nondeductible contributions, all traditional IRA withdrawals are subject to ordinary income tax no matter when you take them. That's the nature of the tax-deferred growth—taxes are simply delayed until you withdraw from the account.

Aside from paying your regular income tax rate, you can take withdrawals once you reach age 59.5 without incurring the 10% early distribution penalty.

The Early Distribution Penalty

The real issue with traditional IRA withdrawals occurs when they're taken before age 59.5. In addition to the income taxes that will come due, a 10% early distribution penalty is assessed if you haven't yet reached this age when you take your first IRA distribution.


The early distribution penalty can result in cutting the value of the withdrawal almost in half for some taxpayers.

Exceptions to the Withdrawal Penalties on Traditional IRAs

Penalty-free withdrawals from a traditional IRA prior to age 59.5 are permitted under certain circumstances. These circumstances are known as exceptions and they include the following scenarios:

  • You die and the account value is paid to your beneficiary.
  • You become totally and permanently disabled.
  • You use an early withdrawal to pay for unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI) or more than 10% if you are under age 65.
  • You're unemployed for 12 weeks or more and you use the early IRA withdrawal to pay for medical insurance for yourself, your spouse, or your dependents. You must take the distribution no later than 60 days after you begin working again.
  • You begin to take substantially equal periodic payments on a regular distribution schedule. Be warned, however: you're locked in if you do this. You can't change your mind and pull the plug after you begin receiving payments.
  • Your withdrawal is used to pay for qualified higher education expenses for yourself, your spouse, dependents, or beneficiary.
  • Your withdrawal of up to $10,000 is used for a qualified first-time home purchase within 120 days of the time you take it. This exception includes building or rebuilding a first-time home.
  • You're a member of the National Guard or a reservist and you're called to active duty for a period of at least 180 days, with some restrictions.
  • You roll the proceeds over into another IRA within 60 days of your withdrawal.

Taking the early withdrawal from your IRA might not be your best financial move in some of these circumstances. You might dodge the additional 10% tax, but you'll lose all the potential future investment growth of this retirement plan money.

Required Minimum Distributions

Required minimum distributions (RMDs) must commence by age 72 for those who were younger than age 70.5 prior to Jan. 1, 2020 based on the rules from the SECURE Act passed in late 2019. Those who had reached age 70.5 on or before Dec. 31, 2019 are required to continue their RMDs as required under the old rules.

You can delay taking your initial RMD from your IRA plan and maximize the benefits of tax-deferred growth until April 1 of the year following the year in which you reach the age at which RMDs must commence. Doing this means that you will need to take two distributions from the account in that calendar year, and this could result in a significant tax hit in that year.

After the initial RMD year, you must take your RMD in each subsequent year by December 31 of that calendar year.

Your RMD is calculated based on your traditional IRA account balance as of December 31 of the preceding calendar year. It is calculated based on your age using the appropriate IRS table. As a practical matter, IRA custodians are required to do these calculations and to report the number to the IRS.

The penalty for not taking your full RMD is 50% of the difference between what should have been distributed and what was actually withdrawn. In addition to the penalty amount, the taxes on the amount that should have been withdrawn are still due.

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  1. IRS. "Retirement Plan and IRA Required Minimum Distributions Faqs - What Happens If a Person Does Not Take a RMD by the Required Deadline?"

  2. IRS. "IRA FAQs - Distributions (Withdrawals)."

  3. IRS. "Retirement Topics - Exceptions to Tax on Early Distributions."

  4. IRS. "IRA Required Minimum Distribution Worksheet."

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