Understanding Individual Retirement Account Distributions


The Individual Retirement Account (IRA) is a very popular vehicle for retirement investing in the United States of America. The various types of IRA accounts offer specific tax benefits and, as such, the distributions from those accounts are heavily regulated to ensure investors don’t take unfair advantage of the provisions of the account.

A popular misconception about IRA account distributions is that once funds have been invested that they may not be removed (or distributed) until the account holder reaches retirement age (set at 59 and a half by the terms of the IRA account). In reality, funds from an IRA can be distributed to the account holder at any time but, unless the distribution meets certain criteria, the funds removed will be subject to penalties.

The baseline condition for IRA distributions is that they can be withdrawn at or after retirement age provided the account owner pays normal income taxes on the distribution. For Roth IRA accounts these withdrawals must begin by age 70 and a half or penalties will be levied in the amount of one-half of the minimum distribution amount that should have been taken at that time. Exceptions to these baseline rules are recognized by the Internal Revenue Service (IRS) and are detailed next.

Medical Emergency ExceptionsPenalty-free distribution of IRA funds can be made to pay for un-reimbursed medical expenses that are in excess of 7.5% of the account holder’s adjusted gross income or in order to pay medical insurance premiums for the time period when the account owner is unemployed. Provision is also made to allow distributions in the event the account holder suffers a permanent disability and is unable to work.

Education and Homeowner ExceptionsIRA funds used to pay qualified higher education expenses for the account holder, their children, or their grandchildren are also exempt from penalty. Distributions to build or buy a first home up to a maximum of $10,000 are also allowed without penalty.

Miscellaneous ExceptionsAmounts distributed to the beneficiaries of the estate of a deceased account holder are exempt from penalty as are funds received from annuity payments that are part of an IRA account’s holdings. Additionally, any payments owed the IRS for unpaid or underpaid taxes (and the associated penalties) can be garnished from an IRA account without the account owner being assessed penalty for the distribution.

The IRA is a great option for retirement savings and offers substantial benefits over ordinary investment accounts. With these benefits, however, come restrictions on how the money that’s invested can subsequently be withdrawn. The funds are meant to be used for funding retirement and any other use is subject to oversight and substantial penalty if it’s not covered by a recognized exception.

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