By: Clay Wyatt
You've invested money in an IRA. Now, you're wondering what will happen when you take IRA distributions. This depends on several factors - perhaps the most important of which is age.
Age is always relevant when considering IRA distributions. If you are under age 59 ½, you will probably face some difficulty in completing IRA distributions. You will have to pay a 10 percent penalty in addition to ordinary taxes unless you qualify for an IRA withdrawal penalty exemption. An exception may be granted for reasons such as a new home purchase, medical expenses, and higher education expenses. Here's a large list of ways to take IRA withdrawals without penalty.
If you are age 59 ½ or older, you are free to take money whenever you want. You must still pay taxes on this money, but the IRS will not impose a 10 percent penalty. The amount you take is up to you. Keep in mind that you do not have to take any money at this point and may choose to leave it in there if you do not need it.
Once you reach age 70 ½, you may no longer leave your IRA untouched. This is because the IRS requires you to take IRA distributions annually at this point, which are known as required minimum distributions (RMD). Should you choose to ignore this rule, the IRS will impose a 50 percent penalty on the amount that was supposed to be distributed in addition to any taxes that were owed on it. Needless to say, it is best to avoid this situation.
There is one way to avoid having to ever take IRA distributions. You could do so by choosing to invest in a Roth IRA instead. With this, you'd pay taxes upfront on the money you contribute and could theoretically leave it in there for the rest of your life without ever having to touch it. The principal (which has already been taxed) and the interest would then be free to grow without any further taxation as long as you'd like them to. This isn't a bad idea if you are OK with paying the taxes presently instead of paying them when you take IRA distributions. In either case, you are taking a bit of a gamble with current versus future tax rates and a host of other issues, so it is best to consult a retirement advisor before making a decision.
Ultimately, it is best to wait until you are at least 59 ½ before taking IRA distributions. This will allow you avoid worrying about every last detail of your IRA distributions and whether or not they are in accordance with the law. Also, keep in mind that you must start taking IRA distributions once you've turned age 70 ½, even if you don't necessarily need them. Failure to do so will result in problems with the IRS.