5 things to know about traditional IRA distributions

By Allstate

Last updated: April 2024

Before you withdraw money from a traditional Individual Retirement Account (IRA), it's important to understand what may happen when you take a distribution. From tax implications to penalties for early withdrawals, here are five essential things to know about traditional IRA distributions.

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1. Know when you can start making IRA withdrawals.

A traditional IRA is intended for use during retirement — thus the name Individual Retirement Account. You can begin making penalty-free withdrawals from an IRA once you're 59½ years old, but you can also wait a bit longer. Effective Jan. 1, 2020, the Internal Revenue Service (IRS) requires people who turn 70½ in 2020 or later to begin taking distributions no later than the April 1 in the calendar year following their 72nd birthday.

2. You can withdraw money anytime you want from a traditional IRA — but you may face penalties.

You can withdraw funds from a traditional IRA whether you're working or retired. But, keep in mind that no matter your employment status or your age, the money you withdraw will be taxed as ordinary income, says the IRS. And, if you're under the age of 59½ at the time you tap into your IRA, you may be hit with an additional 10 percent early-withdrawal penalty.

3. The IRS offers some exceptions to early withdrawal penalty.

The IRS may let you off the hook for the 10 percent early-withdrawal penalty if you're a qualified first-time homebuyer (withdrawals may not exceed $10,000) or if you need to pay medical insurance premiums while you're unemployed. A few other exceptions apply, including paying for qualified higher education expenses or distributions for military reservists called into active duty.

4. You must withdraw a minimum amount every year.

Once you reach the age when the IRS requires you to take distributions, you'll need to take a certain amount out of your IRA each year. It's called the required minimum distribution (RMD), and the IRS provides a worksheet to help you calculate the figure on its website. Of course, you can take more than the RMD if you want. The point is, if you skimp on your RMD, or skip it altogether, you may have to pay a 50 percent excise tax on the amount you failed to withdraw.

5. Required distributions have set timelines and potential tax implications.

The IRS requires you to take out money annually no later than Dec. 31 beginning in the calendar year after you turn 72. So if you reach 72 on June 30, 2020, and choose to delay your initial withdrawal until April 1, 2021, you'll be required to take a second distribution later that year. While it might be nice to have more money in hand, keep in mind that both withdrawals will be taxed on your 2022 returns. If you want to avoid the double whammy, it's better to take the initial withdrawal in the same calendar year you turn 72.

These are some of the basics for managing a traditional IRA withdrawal. If you need help managing your IRA to make the most out of your retirement, talk to a financial professional.