Mandatory minimum distributions from traditional Individual Retirement Arrangements (IRAs) must begin by April 1 of the year after the plan’s owner reaches 70-1/2 years of age. Failure to begin taking the minimum distribution at this point carries a penalty of half the amount that should have been taken.
Qualified distributions from traditional IRAs may begin earlier, as soon as the person holding the IRA reaches 59-1/2 years old. However, the IRA funds to be withdrawn must have been kept in the IRA plan for a minimum of five consecutive years. Qualified distributions cannot begin until this 5-year seasoning period has passed.
An employee who has become disabled may draw from a traditional IRA before he reaches 59-1/2 years of age. Qualified distributions may be made instead to an alternate payee or beneficiary. The five-year seasoning period must have passed.
Funds which are withdrawn from a traditional IRA outside these conditions are considered a non-qualified distribution. These withdrawals are subject to a tax penalty of 10 percent. Withdrawals which are made before the funds have been held in the plan for two years are subject to a 25 percent tax penalty.
Special penalty-free IRA distributions can also be taken at other times:
* A one-time special IRA distribution is allowed when buying a first house, which is to be used as a principal residence. The lifetime maximum on this withdrawal is $10,000.
* Special penalty-free IRA distributions are allowed for the portion of unreimbursed medical expenses that are more than 7.5 percent of adjusted gross income.
* Special penalty-free IRA distributions are allowed that are not more than the qualified higher education expenses of the IRA owner or his children or grandchildren.
Regardless of the reason or type of withdrawal, the tax on a traditional IRA is only deferred, not eliminated. Tax must be paid normally on all withdrawals, whether they are qualified or non-qualified.
Inheriting an IRA
Qualified payments may be made to the alternate payee or surviving spouse of the owner of an IRA. Tax can be deferred on a traditional IRA if the qualified distribution is directly rolled over to that person’s designated traditional IRA.
Roth IRAs
There are fewer restrictions on withdrawals from Roth IRAs than on traditional IRAs. Designated Roth contributions are included in gross income at the time they are made. Withdrawals from Roth IRAs are non-taxable, providing the conditions of the Roth account are met.
However, the owner of a Roth IRA must still be at least 59-1/2 years of age for fully tax-free withdrawals on the growth portion above the principal. Otherwise, the growth portion of the non-qualified withdrawal is taxable and must be included in gross income. A direct rollover to a different IRA plan avoids this penalty and tax.