Article: Following the Rules: Withdrawing From Your IRA


If you don't plan ahead on how and when you should access your IRA (individual retirement account) money, you may get a worse tax bite than necessary.

The rules that govern minimum required distributions from IRAs are among the most complicated in our tax code. This article can only give a brief overview so it's best to consult with an IRA specialist before making a distribution decision.

Required minimum distributions

If you own a traditional IRA, you must start taking a minimum amount of money out of your IRA by April 1 the year following the year in which you reach age 70½--your required beginning date. You always can take out more, but not less than the required minimum distribution amount. The required minimum distribution amount is based on a calculation of your account's value and your life expectancy--how many more years you are expected to live. The longer your life expectancy, the lower the annual required distribution.

If you do not take at least the minimum required withdrawal amount each year, you'll owe a 50% penalty on the amount that should have been withdrawn.

Roth IRA owners are not required to take minimum distributions during the owner's lifetime. Roth owners can let their IRA grow free of federal taxes longer and take the money out on your own timetable.

Tax consequences of a withdrawal

Dipping into your IRA, of course, means you'll also get stuck with an income tax bill. Traditional IRA funds are taxed upon withdrawal. At that time, the owner must add the amount of the withdrawal to his or her income taxes for the year of the withdrawal.

For example, if your taxable income is $30,000 and you withdraw $5,000 from your traditional IRA, then you will pay taxes on $35,000 for that year. Owners who make nondeductible contributions do not pay taxes on that portion of their traditional IRA withdrawals.

Because Roth IRA contributions are not tax deductible, they are not taxed when withdrawn. Roth IRA earnings are taxable if the withdrawal is not a qualified distribution. Contributions to a Roth IRA are withdrawn first, so no taxes are owed until the owner "dips" into their earnings.

It's the IRA owner's responsibility to determine the taxable portion of each withdrawal, with assistance from a professional tax adviser.

Copyright 2008 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.