Traditional IRA Withdrawal Rules Made Simple

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An individual retirement account is an excellent way to save for retirement. Many employers allow you to invest pre-tax money in your IRA right from your paycheck, so it’s easy and convenient. However, you’ll pay taxes on that money when you withdraw it, and possibly penalties.

You might wonder when you can withdraw money from your IRA without incurring penalties or how you can avoid a hefty tax bill. Read on to learn about IRA withdrawal rules that you should know.

Withdrawal Rules for Traditional IRAs

If you’re younger than 59 ½, you’ll incur a 10% penalty by tapping into your retirement account early.

These penalties apply to traditional IRAs and SEP, SIMPLE IRA, and SARSEP plans. You’ll also pay taxes on the amount you withdraw unless you withdraw from a Roth IRA. No matter what, there will be taxes to pay on withdrawals, though there might be exceptions at least to early withdrawal penalties.

Early Withdrawal Rules and Penalties

What are the exceptions to the early withdrawal penalty on IRAs? Here are some of them:

Buying a First Home

Qualified first-time homebuyers can withdraw as much as a pre-tax amount of $10,000 without penalty. However, you’ll still owe taxes on the money.

If you and your spouse both have IRAs, you can withdraw up to $20,000. You can also use the money to help a first-time homebuyer in your family, such as your child, your spouse’s child, your grandchild, your spouse’s grandchild, your parents or another older relative. Make sure you use the money within 120 days after you withdraw it.

Medical Expenses

If you have medical bills that exceed 7.5% of your income, you’ll be able to withdraw from your IRA without paying the 10% penalty. However, you’ll still owe regular income tax on the amount you’ve withdrawn. All expenses must qualify under the current IRS guidelines.

Qualified Higher Education Expenses

You can use money from your IRA to fund higher education expenses for you, your spouse, your child or your grandchild. You can use the money for books, tuition, fees or even room and board if the person attends school more than half-time.

There’s no limit to how much you can withdraw. Keep in mind that withdrawing from either a Roth or a traditional IRA to pay for college may affect financial aid.

Health Insurance

If you’re uninsured for more than 12 weeks due to unemployment, you may withdraw money from your IRA to secure health insurance for you and your spouse.

Good To Know

Once you turn 59 ½, you can take withdrawals from your IRA without incurring any penalties. If it’s a traditional IRA you will pay taxes on the withdrawals, but if it’s a Roth IRA you’ll have used after-tax dollars to fund the account.

Required Minimum Distributions

You can’t keep funding your IRA indefinitely — eventually, you’re going to have to take withdrawals. These are called required minimum distributions.

If you were born between Jan. 1, 1951, and Dec. 31, 1959, you must begin taking RMDs at age 73. For example, if you turn 73 in 2025, your first RMD is due by April 1, 2026.

To calculate your RMD, you can refer to the IRS-provided worksheets. Or you can use this formula:

1. Take the IRA balance from Dec. 31 of the previous year.
2. Get the distribution period from the table below for your age on your birthday for this year.
3. Line 1 divided by the number you entered on line 2 is your RMD.

Tax Implications of Traditional IRA Withdrawals

It’s tempting to tap into your retirement funds, but unless you meet one of the early withdrawal penalty exemptions, you’ll pay taxes and a penalty. Consider a home equity loan or a home equity line of credit instead.

Withdrawals Are Taxed as Ordinary Income

Traditional IRA withdrawals would be considered ordinary income, so they are taxed as income for the year they were withdrawn. Your contributions are also made with pre-tax dollars.

Estimating Taxes on Your Withdrawals

To estimate taxes on your IRA withdrawals, you’ll need to add the amount to your taxable income for the year. Check the IRS tax brackets to see which one your total income falls under. If you’re less than 59 ½ years old, you may be required to pay a 10% withdrawal penalty, unless you have a qualified exemption.

State Taxes and Distributions

States such as Florida, Texas and Nevada do not tax personal income, so there won’t be a tax on your IRA withdrawal. However, the states that do tax income may also consider your tax withdrawal as income. It’s best to double-check your state’s guidelines on IRA withdrawal rules to be certain.

IRS Tax Levy

If you owe money to the IRS, you can make a withdrawal from your IRA to get caught up. To claim the penalty exception, fill out Form 5329.

How To Make Withdrawals from a Traditional IRA

You can take more than the minimum, but you must take at least your RMD by Dec. 31 each year. Also, keep in mind that the distributions will be taxed at your ordinary income tax rate if you withdraw from a traditional IRA, a SIMPLE IRA, a SEP,or a SARSEP IRA. If you withdraw from a Roth, withdrawals are tax-free because you paid taxes on your money before you invested it.

Common Mistakes To Avoid With Traditional IRA Withdrawals

Here are a few things to watch for when you’re withdrawing traditional IRAs.

Not Taking RMDs on Time

If you don’t take your RMDs, or you could face a penalty of 25% on the amount you should have withdrawn. If you correct the mistake quickly, though, the penalty can be reduced to 10%.

Withdrawing Too Much and Increasing Tax Liability

As noted earlier, if you withdraw money from your IRA, that will be considered taxable income for the year it was withdrawn. This could potentially push your yearly income into a higher tax bracket. If you want to minimize the amount of taxes you may need to pay, it’s best to spread out your withdrawals over time, rather than all at once.

Long-Term Impact of Early Withdrawals on Retirement Savings

While there may be taxes to be owed on early withdrawals, you also might want to consider how withdrawing the money now could impact your retirement savings. Remember that in an IRA, your funds compound interest, which is one of the ways your money grows without needing extra work from you to manage. You may need the money more in retirement than you do in your prime earning years, for example.

Alternatives to Withdrawing from Your IRA

Before pulling money from your IRA, it’s worth exploring other options that can help you avoid taxes, penalties, and long-term financial setbacks. Here are some alternatives to consider:

• Use emergency savings or taxable accounts first. If you have a savings account, money market fund, or a taxable brokerage account, consider using those funds instead. These accounts are more flexible and don’t carry early withdrawal penalties or tax implications.
• Withdraw Roth IRA contributions. If you have a Roth IRA, you can take out the money you originally contributed at any time without taxes or penalties. Just be cautious not to withdraw investment earnings, which may be subject to restrictions.
• Borrow from a 401(k), if you have one. Some 401(k) plans allow loans. You borrow from your balance and repay the money, with interest, back into your account. It’s a way to access cash without triggering income tax or early withdrawal fees–if the loan is repaid on time.
• Use a 60-day rollover cautiously. With an IRA, you’re allowed to take money out and return it within 60 days without penalty. However, you can only do this once in a 12-month period, and strict rules apply–so it’s best used as a last resort.
• Make a qualified charitable distribution (QCD). If you’re 70½ or older, you can donate directly from your traditional IRA to a qualified charity. This counts toward your required minimum distribution and avoids the taxes you’d otherwise owe on the amount.
• Reinvest required minimum distributions (RMDs). Once you’re taking RMDs, you can reinvest those funds in a taxable investment account. This lets your money keep growing even though it had to be withdrawn from the IRA.

Final Thoughts on Traditional IRA Withdrawal Rules

If you’re between 59 ½ and 73, you can withdraw from your IRA without penalty, though the money will be taxed as ordinary income. You can also leave it alone to invest and continue growing it.

However, once you turn 73, make sure you’re taking the required minimum distribution so that you don’t have to pay a penalty.

If you ever need guidance, a financial advisor may be your best bet to create a withdrawal strategy that helps keep more money in your pocket–now and at retirement.

Melanie Grafil and Natalie Campisi contributed to the reporting for this article.

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