Note those two little words: a few. The IRS may let you off the hook for the 10 percent penalty early-withdrawal penalty if you’re a qualified first-time homebuyer (withdrawals may not exceed $10,000) for example, or if you need to pay medical insurance premiums while you’re unemployed. A few other exceptions apply with regard to higher education expenses and military reservists.
A traditional IRA is intended for use during retirement — thus the name Individual Retirement Account. So, the IRS requires you to crack open your nest egg when you reach age 70½. You have until April 1 of the following calendar year to make an initial withdrawal. How does that work? Let’s say you turn 70½ on June 30, 2016. You can delay the first withdrawal until April 1, 2017. If you do wait until the following year, however, there may be tax implications (see No. 5).
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.
Why? Because the IRS requires you to take out money annually no later than Dec. 31 beginning in the calendar year after you turn 70½. So if you reach 70½ on June 30, 2016, and choose to delay your initial withdrawal until April 1, 2017, you’ll be required to take a second distribution later that year. While it might be exciting to have more money in hand, both withdrawals will be taxed on your 2017 returns. If you want to avoid the double whammy, it’s better to take the initial withdrawal in the same calendar year you turn 70½.
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 advisor.