At What Age Can You Withdraw From Your IRA Without Penalty?

Basics

IRA is an acronym for Individual Retirement Account, and is a tax-preferred savings instrument. Although IRAs are not entirely tax-free, their effective rate of taxation is significantly lower than a conventional savings account. IRAs are traditional or Roth IRAs, both of which have distinct advantages and shortcomings. Contributions into traditional IRAs are tax deductible, resulting in a smaller tax bill at the time of contributions. Roth IRA contributions are not tax deductible, but the money in a Roth IRA grows tax free, thus leading to a smaller tax bill later down the road.

Contribution Limits

The lower rate of taxation for IRAs means the government forgoes tax revenue to make saving for retirement more attractive for investors. To strike the right balance, the amount of total money that can be contributed to traditional plus Roth IRAs is limited. As of 2010, investors below the age of 50 can contribute a total of $5,000 to their IRA accounts, while those over 50 can contribute $6,000. Older investors can make slightly larger annual contributions as they get closer to retirement and have less time before they may have tap into these funds.

Early Withdrawal

Tapping into your IRA funds before the age of 59 and a half is considered an early withdrawal and is subject to a 10 percent penalty. If the contributions were tax deductible at the time of the contribution, the money withdrawn from the account at any point is always subject to income tax. In other words, if it is a traditional IRA, any amount you withdraw is taxed just as if it were wage income, no matter how old you are when you withdraw it. In Roth IRAs, no income tax is paid on withdrawals. There are no penalties if funds are withdrawn after age 59 and a half or more.

Late Withdrawal

The law also tries to discourage a person from keeping all of the funds in the account after age 70 and a half. Beyond that age, you have to withdraw a certain minimum per year or you face penalties. The consequences for failing to take the minimum are severe as the IRS can confiscate half of the shortfall.

Objective

As the name implies, Individual Retirement Accounts are intended to supplement social security benefits during retirement and they are expected to be for the benefit of the individual. Early withdrawals mean the funds are used prior to retirement and are thus discouraged. Not withdrawing beyond 70 and a half makes it exceedingly likely that the funds will be inherited by the next generation, which also conflicts with the mission of these accounts.