An IRA distribution occurs when you take money out of your Individual Retirement Account. You must report all IRA distributions on your annual income taxes. If you take a distribution at too early an age, you may face a tax penalty, and you may replace funds in your IRA after a distribution only under specific circumstances. However, with careful planning, your IRA distribution can fund your lifestyle conveniently and with minimal tax impact.
Roth IRA Qualified Distributions
Qualified Roth IRA distributions are tax free. Qualified Roth IRA distributions must happen at least five years after you first established and funded a Roth IRA, and you must meet at least one of the three following criteria:
You are at least 59.5 years old or the distribution is less than $10,000 and you will use it to buy or build a first home for yourself or a qualified family member.
You have become disabled.
The distribution is made to a beneficiary after your death.
Non-Qualified Roth IRA Distributions
When your Roth IRA distribution is non-qualified, a portion of your distribution may be subject to income tax plus a 10 percent early withdrawal penalty. Only the earnings above and beyond your Roth IRA contributions are taxable. For example, if you deposited $14,000 to your Roth IRA over the years, your funds grew, and you took a $16,000 non-qualified distribution, only $2,000 would be taxable. All future non-qualified distributions would be taxable.
Qualified Traditional IRA Distributions
The government taxes all your distributions from traditional IRAs as income. If your distribution meets the rules for a qualified distribution, you will not be subject to the 10 percent early withdrawal penalty. In general, your IRA distribution will be qualified if you are over age 59.5, or:
The distribution is less than $10,000 and you will use it to buy or build a first home for yourself or a qualified family member,
You use your distributions to pay health insurance if you became unemployed within the previous 12 months.
You use the distribution for qualified higher-education expenses for you or your dependents.
Your distribution is a direct rollover to another retirement account.
You have become disabled.
Or the distribution is made to a beneficiary after your death.
Substantially Equal Periodic Payments
If you need to take money from your IRA and you are younger than age 59.5, you can avoid the 10 percent early withdrawal penalty by using Substantially Equal Periodic Payments. Your withdrawals would still be subject to income tax. SEPP must continue for at least five years or until you reach age 59.5, whichever is longer. There are several methods to calculate the amount of the SEPP, and each method is based on your IRA value. You must use the same method each year. You can choose the amount to distribute and then segregate the appropriate portion of your IRA assets to a new IRA so that the SEPP calculation comes out to your chosen amount. The advice of a CPA would be helpful before starting SEPP.
Required Minimum Distributions
When you reach age 70.5 or when you retire, whichever is later, the government will insist you to take a required minimum distribution (RMD) from your IRA each year. Your distribution will be taxed as income. In the first year you turn 70.5, you can delay your RMD until April of the next tax year. In all other years, your RMD must be taken before the end of the year or it will be taxed at a 50 percent rate. You may always take more than the RMD.
Warnings
A large IRA distribution can move you into a higher income tax bracket. Consider dividing your distribution between December and January in order to spread the impact over two years. Once an IRA distribution is made, those assets can no longer grow tax-exempt. Avoid taking unnecessary distributions.
Member Comments