Taking money out of an IRA is as easy as calling the financial institution where your IRA account is at, and telling them you would like to take money out. They will need you to sign the appropriate paperwork and may need to read you - or send you - the appropriate disclosures that explain the tax rules of IRA withdrawals.
Depending on what you have your IRA invested in you may need to direct your financial institution as to which assets in your IRA to sell. 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 decide which mutual funds, stocks or bonds to sell.
If don’t need the money to spend, but instead want to move your IRA, you can transfer money 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.
When Can You Take Money Out of an IRA?
You can actually take money out of an IRA anytime. But if you take money out of your IRA before you reach age 59 ½ you may pay a 10% penalty tax on the amount withdrawn. IRA distributions are also included as taxable income when you file your tax return. You may be able to avoid the IRA early withdrawal penalty tax if you qualify for an exception to the IRA early withdrawal penalty.
Bottom line: 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 in Taxes Will I Pay on IRA Withdrawals?
Any time you take money out of a traditional IRA, it becomes taxable income in the year it is withdrawn.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 the total amount of other income and deductions you have.
If you have no other income the year you take an IRA withdrawal and you have sufficient deductions, it is possible you won’t pay any taxes at all. You can learn about the tax rules that apply in Taxes on IRA Distributions.
Mistakes When Taking Money out of an IRA
You may find yourself in debt and feel that taking money out of an IRA is your only option. Think twice before you use this option. IRA money is protected from creditors in the case of bankruptcy. What if your financial situation gets worse? By taking money out of your IRA you will be voiding the valuable creditor protection described below.
- IRA money is creditor protected in several ways:
- Up to $1 million of IRA money is protected from bankruptcy claims under federal law if you contributed directly to the account (meaning this protection may not be extended to an IRA account that you inherited).
- 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 bankruptcy. This is determinded by state law and laws vary widely from state to state.
The Best Time to Take Money Out of an IRA
An IRA is an Individual Retirement Account. You put the money in there so you can use it in retirement. The best time to take money out of an IRA is according to a smart withdrawal plan. A withdrawal plan means you have looked at your expected income each year in retirement and the starting date of Social Security, pensions and any other sources of income, and then estimated your tax situation in retirement and used that to decide which years you should take more or less IRA withdrawals.
When Do I Have to Take Money Out of an IRA?
For a traditional IRA (not a Roth IRA) you must begin withdrawals soon after reaching the age of 70 ½. These withdrawals are called required minimum distributions. The amount you must withdraw is determined by a formula that is recalculated each year based on your age and prior year end account balance.
What about Taking Money Out of a Roth IRA?
The rules discussed above apply to traditional IRAs where you made deductible contributions. Roth IRAs are taxed differently. Learn more in When are Roth IRA Withdrawals Tax Free.