Timing
Taking a distribution from an Individual Retirement Account (IRA) can free up extra money to be used on bills and living expenses or simply supplement regular retirement income. Those who are in financial crises and need access to immediate cash, however, may need to obtain it from another source. Getting money out of an IRA can take several days. Depending on the type of account the IRA is invested in, the wait could be as long as five business days. In addition, if the custodial firm holding the IRA is unable to transfer the funds to your bank account electronically, you need to add additional time to receive the check in the mail. If the distribution check is for a large amount, your bank may also elect to place a hold on it, creating an additional delay.
Penalties
In some cases, you may incur a penalty on an IRA distribution. Investors under the age of 59 and a half are charged early withdrawal penalties by the Internal Revenue Service (IRS). In most cases, penalties can be withheld by the custodian at the time the distribution is taken or you can choose to pay them when you file your annual tax return.
Taxes
When taking a distribution from an IRA, it is important to consider the tax implications. Contributions to Traditional IRAs are made with previously untaxed funds. When you take a withdrawal, you are taxed on the entire amount you take out; both the principal and earnings are taxed as ordinary income. Significant distributions can result in huge tax implications that must be fully considered. In contrast, contributions to Roth IRAs are made with funds that were already taxed. When you withdraw from a Roth account, you are taxed only on the earnings and not the principal.
Requirements
Those who invest in Traditional IRAs are required to take distributions. Beginning in April of the year after the year you reach the age of 70 1/2, you must take withdrawals from your IRA. If you fail to take the minimum amount of money out of the account, the IRS charges lofty penalties. Roth IRA holders, however, are not required to take minimum distributions at any age.
Rollovers
If you do not need to use the money and simply want to change the custodian or type of account your IRA is invested in, do a rollover instead of a distribution. Unlike a distribution, rollovers are not considered taxable events if the money is quickly moved into another qualifying retirement account. Because IRS regulations regarding rollovers can be complicated, it is best to see a banker or investment advisor for help. Financial professionals can process the rollover for you and move the money directly to the new custodian or account.
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