IRA Withdrawal Rules

IRA Withdrawal Rules

IRAs are valuable savings tools for retirement- but what happens if and when you want to withdraw money? Several rules apply to traditional IRA and Roth IRA withdrawals that you must understand to maximize your savings opportunities and minimize potential taxes and penalties.

This guide covers the basic rules that apply when you withdraw funds, including early withdrawals, required minimum distributions, tax implications, and a few special scenarios.

What Will I Learn?

Understanding Individual Retirement Accounts (IRAs)

An Individual Retirement Account (IRA) is a tax-advantaged way to save money long-term. They help people prepare for retirement and act as a source of income after a certain age.

The two most popular types of accounts are traditional IRAs and Roth IRAs. A traditional IRA is funded using pre-tax dollars, while Roth IRA contributions are after-tax. Both accounts let you build tax-deferred savings but in slightly different ways.

Annual contribution limits apply to these accounts. The total per year (combined) is $6,500 if you are younger than 50 and $7,500 for over 50’s. Deductions are not generally limited by dollar amount, but there are time restrictions- which we will explore below.

IRAs let you invest in many assets, stocks, and bonds. Treasury bills and ETFs are two of the popular options.

Purpose of an IRA

The purpose of an IRA is to hold assets for retirement.  IRAS provide people a shelter where assets can be stored until the individual is ready for retirement age.

Types of IRAs: Traditional and Roth

There are different types of IRAs, but we’ll talk about the two main types. A traditional IRA and a Roth IRA.  When we compare traditional and Roth IRAs, the traditional IRA is the most widely used, while the Roth IRA allows the money to grow tax-free over the time it’s invested.  

Contribution and Deduction Limits

Both the traditional IRA and Roth IRA have contribution and deduction limits.  Each limit is different and income-dependent.  

Investment Options within an IRA

IRAS offer many investment options, but mostly stocks, bonds, mutual funds, and the such.  If you are looking to invest in asset classes outside of those, a Self Directed IRA allows that ability.  
withdrawal from gold ira

IRA Withdrawal Basics

You are allowed to take distributions from your IRA any time.  You won’t need to show hardship or go through any hurdles to do this.  However, if you take a withdrawal prior to the retirement age of 59.5, you will have a 10% penalty and the withdrawal will show up on your taxable income.
Age Considerations for IRA Withdrawals

In most cases, IRA withdrawals made before age 59 1/2 carry penalties. Traditional IRA holders who withdraw before this age will pay regular income tax on the amount and a 10% early withdrawal penalty. Roth IRA holders only face early withdrawal penalties if the amount exceeds the total contributions and eats into the earnings.

Early Withdrawals: Consequences and Exceptions

Normal Withdrawals: Post 59½ Age Rule

If you are over the age of 59.5, you are able to do a normal withdrawal without any additional penalty.  Depending on the type, or in easier terms, if it’s not a Roth IRA, you’ll take the withdrawal and add it to your taxable income.

Late Withdrawals: Required Minimum Distributions

Another age-based rule for traditional IRA holders is the RMD age. Once you reach 73, you must withdraw certain distributions annually. How much depends on your life expectancy and previous end-of-year balance on the account.

Tax Implications of IRA Withdrawals

Early withdrawals are taxed as normal income. The tax implications depend on your current tax bracket at the time of withdrawal.

There are no penalties on either type of IRA between the ages of 59.5 and 73, but you will pay taxes on withdrawals from a traditional IRA. Roth IRA withdrawals are tax-free if the account has been open for more than five years.

Taxable and Non-taxable Withdrawals

Roth IRA withdrawals are not taxed if taken after the age of 59.5.  However, if you are below that age there will be a 10% penalty as well as the money will be added to your taxable income for that year.

Federal and State Taxes on Withdrawals

Both Federal and State taxes on withdrawals are applicable per the above regulations I just described.

Penalty-Free Withdrawals and Exceptions

Here are some exceptions to the early withdrawal rules.

  • Total and permanently disabled account owners
  • Beneficiaries after the owner’s death
  • Health insurance premiums
  • Unreimbursed medical expenses
  • The birth or adoption of a child
  • First home purchase
  • IRS levy
  • Some education expenses

Understanding the 10% Early Withdrawal Penalty

If you do need to access funds prior to the retirement age, you will incur a 10% early withdrawal penalty.

Specific Exceptions to Early Withdrawal Penalties

Roth IRA rules are a little different from traditional IRA withdrawal rules. In a nutshell, you are taxed only on withdrawals from earnings. Contributions can be withdrawn at any time without fees or taxes.

The Roth IRA five-year holding period is a general rule for all accounts. You cannot withdraw funds within five years of the first contribution without facing a penalty.

tax free or tax deferred traditional ira vs roth ira

Roth IRA Specifics

A Roth IRA allows your investments to grow tax free since you paid the taxes prior to investing in this account.  Please refer to the above fees and taxes if you are considering withdrawing early.  

Roth IRA Contributions vs. Earnings

Again, the major advantage of Roth IRA contributions are that they get to grow tax free since they are not tax deductible.  As mentioned above, there are early withdrawal penalties as well as income taxes due if you withdraw early.  You also have limits on when you can invest in a Roth IRA, which vary every year and depend on your adjusted net income for the tax year..

Roth IRA Income and Contribution Limits

Contributions to a Roth IRA are made on an after-tax basis.

As mentioned earlier the ability depends on your income level, emphasizing the importance of understanding Roth contribution limits.  If you are filing your taxes as a single person, you must have a modified adjusted gross income of under $153,000 for tax year 2023.  For 2024, the number escalates to $161,000.  Should you file as a joint account, the number has to be under $228,000 for the year 2023 and that number bumps to $240,000 for 2024.  

If you are seeking to maximize the investment, you can contribute $6,500 if you are under the age of 50 and up to $7,500 if you are aged 50 or over.

For 2024, you can invest $7,000 under age 50, and $8,000 if you are over age 50.

The Five-Year Rule for Roth IRA

While the Roth IRA no doubt has it’s advantages, it’s important you know about the five year rule.  

While you can take your your investments in a Roth IRA at any time, you typically can’t withdraw any earnings from your investments unless it’s been five years since you first contributed to the Roth IRA.  if you withdraw early, you will be subject to income taxes and possibly a 10% penalty.

Qualified and Non-Qualified Distributions

A qualified distribution occurs when you decide to withdraw after the age of 59.5.  The only exception is if the owner passes away or suffers from a disability.

A non-qualified distribution happens when you withdraw prior to that period.

Roth IRA Conversion: Process and Tax Implications

You do have the ability to shift investments from a traditional IRA or even a 401(k) to a Roth IRA by doing a Roth IRA conversion.  

The amount that you decide to convert will be taxed at the time of conversion to your gross income for that tax year, which currently range from 10-37%.

Strategies to Minimize Tax on IRA Withdrawals

There are a number of ways you can minimize taxes on IRA withdrawals.  The first way is to take the minimum required distribution once you hit retirement age.  The others, I’ll speak about individually below.

Using a Roth IRA or Roth 401(k)

If you are looking to pay zero taxes on withdrawals, the best way to do this is to have your investments in a Roth IRA or Roth 401(k).  Since these accounts allow you to invest post-tax dollars, they grow 100% tax free.

The Backdoor Roth IRA Strategy

There is no required distribution on a Roth IRA account. Rolling over some of your savings means you can leave it there to grow tax-free. As long as it has been more than five years since your first Roth IRA contribution and you are over age 59 and a half, you don’t pay income taxes on any withdrawals- including Roth IRA earnings.

This is a good option if you intend to leave the contents of the Roth IRA to your heirs.

Substantially Equal Periodic Payments Rule

SEPP is a plan where account holders can withdraw funds without penalty for several years before reaching the minimum age. It generally applies to people who retire early for various reasons.

Tax-efficient Withdrawal Strategies

Next, we’ll discuss tax-efficient withdrawal strategies in an effort to help you maximize your tax bills.

Unique IRA Withdrawal Scenarios

Each of the below scenarios allow you to save money on your withdrawals of your IRA investements.

Inherited IRA: Rules and Distribution Options

You do have the ability to withdraw the entire amount of any IRA asset that was inherited from an IRA.  You can take a lump sum payment at any time you wish. Understanding inherited IRA distributions is crucial in this context. There is a 10-year rule if the previous IRA owner passes away before the RBD, and you can withdraw the funds at any time assuming the IRA balance is completely withdrawn by year end of the 10th year the previous owner passes away.

Using IRA for Adoption or Higher Education

You can withdraw up to $5,000 within the first year of adopting a child without paying a penalty. Education for the account holder, their child, or their grandchild is another penalty-free exception- as long you prove the students attend a qualified institution. The tuition amount can be withdrawn, along with other qualified expenses.

IRA Distributions for Medical Expenses and Health Insurance

If you have medical expenses that are not covered by insurance exceeding 7.5% of your AGI, you can apply for a penalty-free IRA withdrawal to pay the extra. Penalties may also be waived on withdrawals to pay health insurance premiums while unemployed- as long as certain conditions are met.

IRS rules and regulations for individual retirement account

IRA and IRS Levy: What You Should Know

The IRS can levy your IRA assets to recover taxes owed. They can do so at any time- regardless of age. You may incur taxes on an IRS levy but should not receive an additional penalty. Speak to a tax advisor for assistance.

Spousal IRA Withdrawal Rules

Spousal IRA contributions are when one spouse pays contributions in the name of the other, either because they are not working or earn less. Withdrawal rules for spousal IRAs are the same since there is no difference in account type. Remember, your adjusted gross income cannot exceed $218,000 for joint Roth IRA filers.

Understanding Spousal IRAs

While a spousal IRA is not a totally unique type of IRA, it does fall under the ruling of the IRS in the fact that it permits a partner to contribute to their spouses account as well.  In order to qualify for this, you must file taxes jointly and be married.

Withdrawal Rules for Spousal IRAs

Should the IRA owner pass away prior to the year they turn age 73, the distributions do not have to take place until the original owner were to reach the age of 73.  After this age, the surviving person can calculate their RMD’s based on their own life expectancy.

Rollover Options for Spousal IRAs

If you are looking to roll over a spousal IRA, you need to know your options.  First, you can maintain the inherited account and take distributions based on your life expectancy or choose to follow the five year rule.  The other option is to rollover the account into your own account.

IRA Rollover Rules and Considerations

Finally, we’ll talk about the IRA rollover rules and considerations you need to know and follow if you are looking to avoid penalties and taxes.  

Understanding IRA Rollovers

For the most part, any pre-retirement payment you receive from your investments can be rolled over by simply depositing the funds into another retirement plan inside a 60-day window. Read our detailed guide about what is a rollover IRA in case you haven’t researched this option.
types of ira explained

Direct vs Indirect Rollovers

It’s also important to know the difference between direct and indirect rollovers.  

A direct rollover acts like a transfer, but this is done between two types of accounts.  As an example, you can roll over a 401(k) plan to a traditional IRA.  This requires your administrator sending your balance to another qualified retirement account.  

An indirect rollover is more complex.  You will also have more rules to follow when doing an indirect rollover.  You’ll receive a payment for your balance or an amount you decide to request, but this will be without any taxes incurred.  You have 60 days to deposit the funds.

Tax Implications of Rollovers

Rollovers do have tax implications, and it’s important you know them.  For example, let’s say you leave an employer and have a retirement account with them.  You could choose to cash out the account, but you will have to pay taxes and any early withdrawal penalties if you do so.  If you choose to leave the funds in the prior employers account, there will be zero consequences, but you won’t have the ability to contribute funds any further.  If you choose to rollover the funds to another qualified retirement account, there won’t be any tax implications, however you can’t handle the cash and it has to be rolled right into your other account.  

One-Rollover-Per-Year Rule

In a one year period you generally can’t make more than one rollover from the same IRA.  You also can’t do a rollover throughout this one year period from the IRA to which the funds distributed were rollover into. 

Frequently Asked Questions

What are the penalties for withdrawing from an IRA before age 59 1/2? 

A federal penalty tax of 10% is applied to IRA withdrawals made early- on top of regular income tax on the taxable amount.

What are the exceptions to the early withdrawal penalty?

Exceptions apply if the account owner has a total and permanent disability, or if the withdrawal is made after the account owner’s death by the beneficiaries. Up to $10,000 can also be withdrawn early without penalty for a first-time home purchase. Some other exceptions apply for specific educational or health reasons.

How does a Roth IRA differ from a traditional IRA in terms of withdrawal rules?

Withdrawal penalties only apply to earnings from a Roth IRA. Your contributions can always be withdrawn tax-free and without penalty.

What strategies can I use to minimize tax on my IRA withdrawals?

Delaying your retirement, limiting how many distributions you take during the first year, and making qualified charitable donations can help minimize tax exposure on your IRA withdrawals. It also helps to convert to a Roth IRA.

Can I use my IRA money for purposes like education or home purchase without incurring penalties?

In some cases, yes. You can withdraw up to $10,000 as a first-time home buyer without a penalty. Postsecondary education expenses may also qualify as penalty-free withdrawals.


As long as you follow regulations and wait until you are of eligible age, you don’t need to worry too much about IRS withdrawals. You should, however, bear in mind that there is a required minimum distribution once you hit 73.

receiving money from an ira account

Understanding withdrawal rules helps you get the best from your IRA and avoid paying more tax than needed. It also keeps you in the good books with the IRS!

Arthur Karter


Hi, I’m Arthur, and nobody wants to wake up in their 50s like me that they are in serious debt with minimal assets. This wake-up call forced me to reevaluate everything. After going through the school of Hard Knocks, I’m ready to help you by sharing the best retirement choices and how they differ from all the same-old, same-old options that financial advisors sell. These alternatives will help you build and protect your wealth.

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