Funds may be withdrawn from an IRA at any time, but may be subject to taxes and/or penalties, depending on timing.
With Traditional IRAs, for example, withdrawals will always be subject to taxes at ordinary income tax rates. Withdrawals from a Traditional IRA prior to age 59½ also will be subject to an additional 10 percent penalty on the amount distributed, subject to certain exceptions.
There are exceptions to the 10 percent penalty for withdrawals from Traditional and Roth IRAs before age 59½. The early withdrawal penalty does not apply to
IRA distributions that:
- Occur because of the IRA owner’s disability;
- Occur because of the IRA owner’s death;
- Are a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner;
- Are used to pay for un-reimbursed medical expenses that exceed 7.5 percent of adjusted gross income;
- Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks;
- Are used to pay the costs of a first-time home purchase - subject to a lifetime benefit of $10,000;
- Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members; or,
- Are used to pay back-taxes because of an IRS levy on the IRA.
If non-deductible contributions were made to a Traditional IRA, part of any withdrawal from that IRA will not be subject to tax. The IRS provides Form 8606 to report non-deductible Traditional IRA contributions and withdrawals. Millennium Trust recommends consultation with a tax advisor for specific information on IRA contributions and withdrawals.
Required Minimum Distribution
Mandatory IRA distributions, also referred to as Required Minimum Distributions, or RMDs, for Traditional IRAs must begin no later than April 1 of the year following the year the IRA owner reaches age 70½.
Failure to take the required minimum distribution at that age results in a 50 percent penalty tax on the amount not distributed. Roth IRAs have no mandatory distribution requirement.
RMDs are calculated by dividing the IRA owner's prior year end account balance by the applicable distribution period. The regulations, generally, provide for a uniform distribution period for all individuals of the same age, determined by using the Uniform Life Table.
An IRA account owner may need or elect to take a distribution of funds or a required minimum distribution under the laws governing these types of accounts. In either case, consultation with a tax advisor regarding the potential impact of the distribution is warranted.
To locate the forms required to request a distribution,
click here, or contact our Client Services Department at (800) 258-7878 or at distributions@mtrustcompany.com.
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