There are five main types of IRA withdrawals: early, regular, required minimum distributions (RMDs), Roth IRA withdrawals, and IRA rollovers or transfers. Diverse rules apply to each of them and to the reasons why you might take money out of your account. You must report any funds you take out early from your traditional IRA on your 1040 tax form, and you’ll pay income taxes on the money as well. There is no way to avoid the income tax, but you may be able to avoid the penalty tax portion if you are taking money out of your account for a reason listed under the IRA withdrawal hardship rules. If you withdraw the money you’ve earned on the principal balance in your Roth IRA before you reach age 59 1/2 or before you’ve had the Roth for five years, taxes and penalties will apply. If it’s a Roth account in a 401(k) plan, the rules are different. As long as you follow the rules and use the Roth for the years when you are over age 59 1/2 and no longer working, then the money you take out of the account will be tax-free. Because you didn’t pay taxes on the money when it first went into your IRA, the amount withdrawn is included in your current taxable income. You must report it on your 1040 tax form. The amount of tax you’ll pay on getting money from your IRA will depend on your tax bracket and your total taxable income after any deductions you can take that year. If your income is high, you’ll pay taxes at a higher rate. If you have more deductions than you have income, you may pay no tax at all. If you take only part or none of your RMD, the IRS rules require you to pay a 50% tax on the amount of RMD not taken. The amount you must take changes each year, because it’s based on a formula using your age and the prior year-end account balance. You don’t have to take RMDs from a Roth IRA if you own the account, but you will have to take an RMD each year if you inherit a Roth. When you move money from one IRA to another, this is called a transfer. If your IRA money goes between financial institutions and the money is never in your hands, you aren’t subject to taxes or penalties for those transfers. If the IRA funds come to you and you put them back into a qualified account within 60 days, you’ll be spared the taxes and penalties. But you can only do this once during each 12 month period or it may be looked at as a payment subject to tax.
