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Traditional & Roth IRAs: Withdrawal rules and early withdrawal penalties

8 min read

8 min read

Trying to determine which Individual Retirement Arrangements (IRA) is best for you – traditional or Roth? It’s important to understand the traditional IRA and Roth IRA withdrawal rules and early withdrawal penalties (also called the 10% additional tax) as they are very different. Read on and we’ll outline everything you need to know about the when and how for taking money out of Traditional and Roth IRAs – so you can maximize your retirement savings.

Roth IRA withdrawal rules

If you’re taking money out of your Roth IRA, it’s possible some of the withdrawal will be considered contributions and some will be considered earnings. It makes a difference because the tax implications are not the same.

 Let’s break them down:

  • Contributions: Because your Roth IRA contributions are made with after-tax dollars, you can withdraw your regular contributions (not the earnings) at any time and at any age with no penalty or tax.
  • Earnings: Account earnings are taxable only if the distribution isn’t a qualified distribution. If the distribution is qualified, then none of your distribution will be taxed.

Distribution ordering rules for Roth IRAs

IRA withdrawal rules on paper.

If the money you withdraw from a Roth IRA isn’t a qualified distribution, part of it might be taxable. Your money comes out of a Roth IRA in this order:

  1. Regular contributions — always tax- and penalty-free
  2. Conversion and rollover contributions — which come out on a first-in, first-out basis. So, conversions from the earliest year come out first. Read more about converted amounts below.
  3. Earnings on contributions

Roth IRA withdrawal rules: When are withdrawals tax free?

When you make a qualified withdrawal your Roth IRA, earnings (income) are tax-free if:

  • You’ve had the Roth IRA for at least five years, and
  • One of the following applies:
    • You’re age 59 1/2 or older when you withdraw the money
    • You used the money for a first-time home purchase (up to $10,000)
    • You’re totally and permanently disabled
    • You’re the beneficiary of the original account owner who passed away

If the account owner passes away before meeting the first rule, the five-year test, the IRS will tax the beneficiaries on distributed earnings until this test is met. No matter your age, your earnings are taxable if you don’t meet the five-year test. This is true even if your earnings are penalty-free.

The IRS requires your IRA custodian or trustee to send you Form 5498. This shows your:

  • Annual IRA contributions
  • All IRA conversions during the tax year
  • All rollover contributions during the tax year

You should receive the form by the end of May. Keep these records.

When you withdraw income from your Roth IRA, you must report it on Form 8606. This form helps you track your basis in regular Roth contributions and conversions. It also shows if you’ve withdrawn earnings.

Roth IRA early withdrawal penalty and converted amounts

If you convert a Traditional IRA to a Roth IRA, you must pay taxes on the conversion, but then you never have to worry about paying taxes again on that IRA if the withdrawals are qualified withdrawals.

So, what makes it a qualified withdrawal? First, the money must stay in the Roth IRA for five years after the year you make the conversion. The five-year conversion rule is also separate from the five-year qualified withdraw rule discussed above.

For example, if you’re at least age 59 1/2 when you make the withdrawal, you won’t pay the 10% early withdrawal penalty. This applies no matter how long the money is in the account. You also won’t pay a penalty if you:

  • Use the distribution for a first-time home purchase — up to a $10,000 lifetime limit
  • You’re totally and permanently disabled
  • You’re the beneficiary of the original account owner who passed away
  • Qualify for other exceptions that apply to Traditional IRAs mentioned below

Nonqualified withdrawals: If you withdraw conversion contributions before the five-year period is over, you might have to pay a 10% Roth IRA early withdrawal penalty. You usually pay the 10% penalty on the amount you converted that you included in income. A separate five-year period applies to each conversion.

Required Minimum Distributions for Roth IRAs

There’s no required minimum distribution for a Roth IRA prior to the account owner’s death. So, you’re not required to withdraw any retirement income during your lifetime. This can be an advantage of a Roth IRA over a Traditional IRA.

However, take note: You must take RMDs if you have an inherited Roth IRA.

Traditional IRA withdrawal rules

Traditional IRA distributions

If you’re taking income out of your Traditional IRA funds, any penalties and taxes will depend on your situation.  Let’s break them down.

  • Penalties: If you wait until you’re at least age 59 1/2, you won’t pay the 10% early withdrawal penalty on your IRA withdrawals.
  • Taxes: If you claimed a deduction for your traditional IRA contributions, the money you withdraw is taxable. However, if you made nondeductible contributions, part of your withdrawal will be tax-free.

Required Minimum Distributions (RMDs) for Traditional IRAs

As a general rule, begin withdrawing money from your Traditional IRA when you reach your starting age, which is:

  • 72 for those born between July 1, 1949 and December 31, 1950
  • 73 for those born between January 1, 1951, and December 31, 1958
  • 75 for those born on January 1, 1959, or later

Your first withdrawal must be made by April 1 after the year after you reach one of the starting ages listed above. The starting ages are also called the required beginning date or RBD. Then you’re required to withdraw a minimum amount by December 31 each year. If you don’t withdraw the minimum amount, you may have to pay a penalty of 10% to 25% of the amount you should have withdrawn. Minimum IRA withdrawal rules are based on life expectancy. (View IRS Publication 590 BA for details about the life expectancy and formula.)

Traditional IRA withdrawal rules allow you to delay your first Required Minimum Distribution from your IRA to April 1 of the next year. Still, you might want to take your first distribution in the first year you’re eligible. By doing this, you avoid having to take two distributions in the next calendar year.

If you’re still working when you reach your starting date, you can delay required minimum distributions but only from the employer plan with the company you work for. You cannot delay RMDs from Traditional IRAs or from other employers’ plans.

Early Withdrawal Penalties for Traditional IRAs

There is a 10% additional tax on early withdrawals from your traditional IRA. You can receive distributions from your traditional IRA before age 59 1/2 without paying the 10% early withdrawal penalty. To do so, one of these exceptions must apply:

  • You have unreimbursed medical expenses that are more than 7.5% of your AGI.
  • The distributions aren’t more than the cost of your medical insurance due to a qualifying period of unemployment.
  • The distribution is $1,000 or less and for a personal or family emergency expense that is unforeseeable or immediate.
  • You’re totally and permanently ill or disabled
  • You qualify as terminally ill and the distribution is made after December 30, 2023
  • You’re a victim of domestic abuse and the distribution is made after December 31, 2023
  • You’re the beneficiary of a deceased IRA owner
  • The distributions aren’t more than your qualified higher education expenses
  • You use the distributions to buy, build, or rebuild a first home (up to $10,000)
  • The distribution is due to an IRS levy of the IRA or other qualified plan
  • The distribution is a qualified reservist distribution
  • You’re receiving a series of substantially equal periodic payments
  • The distribution is due to a qualified birth or adoption, and the distribution is made after December 31, 2019 (up to $5,000)
  • You receive distributions as a series of substantially equal periodic payments
  • The distribution is a qualified disaster distribution or qualified disaster recovery distribution

Traditional IRA withdrawal rules after death

If you pass away while there’s still money in your Traditional IRA account, the beneficiaries:

  • Won’t pay the 10% early withdrawal penalty — the decedent’s age or the beneficiaries’ ages don’t apply.
  • Will pay taxes on distributions from traditional IRAs. It doesn’t matter that the funds are inherited.
  • If the IRA account has a basis, your account beneficiaries inherit the basis. Beneficiaries should use Form 8606 to figure out the taxable portion of the distributions.

Withdrawal rules are slightly different if you inherit an IRA from your deceased spouse. In this case, you can treat the inherited IRA as your own. Then, you can put off taking the required minimum distribution until you reach your starting age (as described in the RMD section above).

Other options may also be available in a few other special situations:

  • If you’re less than 10 years younger than the decedent
  • The decedent’s minor child
  • You are chronically ill or disabled

Otherwise, most IRA beneficiaries generally must withdraw the entire account balance within 10 years following the year of death. A minor child must follow the 10-year rule starting the year after the child attains the age of majority.  A Beneficiary should check with their tax professional to determine if the beneficiary is required to take RMDs as well.

Looking for help understanding Traditional or Roth IRA withdrawal rules?

There’s a lot to take in where traditional and Roth IRA withdrawal rules are concerned. If you need help understanding your options, our knowledgeable tax pros can help.

Whether you choose to file with a tax pro or file with H&R Block Online, you can rest assured that we’ll get you the biggest refund possible, along with proper guidance in knowing you’ve filed with complete accuracy.

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