When it comes to taking money out of your retirement account, one of the most common questions people have is if they can withdraw money whenever they want. The answer is no! You will need to meet the Internal Revenue Service's qualifications for withdrawing funds from your traditional IRA under penalty of paying taxes and penalties on the amount withdrawn.
In order for you to be eligible to withdraw from your IRA, the IRS requires that you have reached either 59 ½ or have otherwise met an exception before making a withdrawal. If you fail to meet one of these requirements, there are severe penalties the IRS will levy against you including a 10 percent penalty on any pre-59 ½ withdrawals and taxes on the amount withdrawn.
What are some of these exceptions?
There are a number of different exceptions you can make use of should you want to withdraw money from your IRA before reaching the age of 59 ½. The first one is known as substantially equal periodic payments and allows you to withdraw a certain percentage of your IRA every year without incurring any penalty. The percentage is determined by dividing your IRA balance by the life expectancy of your beneficiary and using that percentage to determine how much you can take out each year.
The second exception is called the substantially equal periodic payments or SEPP and uses a three-year moving average of the rate of return on your account to calculate your annual withdrawal amount over a five-year period. You must use this method if your IRA was opened fewer than five years ago and you will need to continue making withdrawals until you reach 59 ½ or die.
The third exception is known as the first home exception which allows you to withdraw up to $10,000 from your IRA without incurring any penalty should it be to purchase, build or rebuild your first home.
And finally, there is the exception known as reservist distributions which allows you to withdraw $10,000 or all of your contributions and earnings in reserve should you be called up for military service during a war.