In this series of articles about IRAs, we have been discussing mostly contributions to IRAs.
However, at some point, we will have the need, or we might be required, to start taking funds out of an IRA. This article will be the first of several write-ups about how to do so to avoid penalties.
The first of the two transaction types that take money out of an IRA are rollovers. The term rollovers describes taking funds out of an IRA to transfer the money into another retirement investment account. I will discuss the rules that govern direct and indirect rollovers, as well as administrative and tax implications in a future article.
But first, I will focus on withdrawals, which are transactions that takes money out of an IRA. Withdrawals occur when an investor takes money out of the IRA and uses it for whatever the owner wishes. The withdrawals can be elective or mandatory. I will discuss the specific requirements and restrictions of elective withdrawals first and then I will go over the mandatory withdrawals.
Here are the basics that investors must know about elective withdrawals.
a. The IRA owner is age 59.5 or older. The 5 age is defined as the date of the IRA owner’s 59th birthday, plus six months.
b. Death or disability of the IRA owner. The definition of disability is unique to the IRS, which defines disabled as “if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued and indefinite duration.”
c. The funds are used to pay for qualifying educational expenses for yourself or a family member. However, the expense must be incurred in the year of the withdrawal.
d. The money is used as a down payment on the purchase of a home for self or family member. This exception is applicable only if the IRA owner has not been a homeowner at any time in the past two years. Additionally, there is a $10,000 lifetime limit, per IRA owner.
e. The funds pay for medical insurance premiums in cases where the IRA owner has been drawing unemployment for at least 12 consecutive weeks.
f. The money is used as part of “Substantially Equal Periodic Payments,” sometimes called a “72t,” where the annual withdrawal is calculated using one of three approved methods and the withdrawals continue to the later of five years or attaining age 59.5.
g. The money pays for qualifying medical expenses that exceed 10% of the IRA holder’s – or spouse’s – adjusted gross income (AGI). However, the medical expense and withdrawal must occur in the same year.
h. The funds are used as distributions to a qualified military reservist called to active duty.
The list above contains just the basic rules that currently cover elective withdrawals from TIRAs. I will try to explain how these rules apply to specific situations in my next article where I will answer some of the most frequently asked questions by real customers. While these answers should cover the majority of situations that you might encounter, provisional advisers always will be able to address your specific situation.
Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.