9 ways to withdraw money early from your IRA

Traditional NYCE IRA Withdrawals

You can withdraw or use your traditional IRA assets at any time.  However a 10% early withdrawal penalty applies, with a few exceptions, if you withdraw or use IRA assets before age 59½.

Required Minimum Distributions

If you are the owner of a Traditional NYCE IRA, you must start receiving distributions from your NYCE IRA account by April 1st of the year following the year in which you reach 72* (Required Minimum Distributions).

*The age for the Required Beginning Date for mandatory distributions increased from 70½ to 72 for distributions required to be made after December 31, 2019 and with respect to individuals who attain age 70½ after such date.

Required Minimum Distributions are based upon a distribution period generally determined using the Uniform Lifetime Table.  However, if the sole beneficiary of the Traditional NYCE IRA is your spouse who is more than ten years younger than you, use the Ordinary Joint Life and Last Survivor Annuities – Two Lives Table.

If in any year you receive more than the Required Minimum Distribution for a particular year, you will not receive credit for the additional amount when determining the Required Minimum Distribution for future years.

Uniform Lifetime TableOrdinary Joint Life and Last Survivor Annuities – Two Lives Table

Withdrawing Money from the Traditional NYCE IRA

To take a distribution from your account, you must submit a Traditional NYCE IRA Withdrawal Form.

You can take a full or partial distribution from your account, or you can schedule periodic payments.  Periodic payments are distributions made over regular intervals and can be made monthly, quarterly, semi-annually, or annually.

* Distributions as a result of death, disability or divorce, please contact the NYCE IRA Administrative Office at (212) 306-7760, or 888-IRA-NYCE, if outside NYC, for instructions.

Taxes

Any earnings grow tax-deferred until you take a distribution, and then you pay federal income tax and applicable state and local tax on the taxable amount of your distribution.

Taxability: Distributions from your Traditional NYCE IRA may be fully or partly taxable, depending on whether your IRA includes any non-deductible contributions.

  • Fully taxable:  if only deductible contributions were made to your Traditional NYCE IRA, all distributions are fully taxable upon receipt.
  • Partly taxable:  if you made non-deductible contributions to your Traditional NYCE IRA, you have a taxable basis equal to the amount of those contributions.  These non-deductible contributions are not taxed when they are distributed to you.  Only the part of the distribution that represents non-deductible contributions is tax-free.  If non-deductible contributions have been made, the distribution consists of both non-deductible contributions (basis) and taxable contributions (earnings, if any).

For more information on figuring the non-taxable and taxable amounts, see IRS Publication 590 or a licensed tax professional.

Withholding:  You determine the amount of federal income tax withheld or choose not to have any withheld by submitting a withholding certificate (W-4P).

If no form is submitted, tax will be withheld on periodic distributions as if you were married claiming three withholding allowances.  Tax will be withheld on a 10% rate for non-periodic distributions.

New York State and New York City Tax Exemption:

Withdrawals from the NYCE IRA are eligible for a $20,000 annual New York State and New York City income tax exemption. This $20,000 exemption is applied against the cumulative distributions from a private employer retirement plan, a 401(k) plan, 457 plan or 403(b) plan, or other traditional IRAs. The exemption applies only to distributions taken as periodic payments to New York residents who are at least age 59½ and is in addition to the state income tax exemption for benefit payments received from the state or local employees’ public retirement systems.

Can I Use Individual Retirement Account (IRA) Money to Adopt a Child?

Yes. A legal adoption or the birth of a child is considered an exemption, too. You can use funds from your individual retirement account (IRA) penalty free for an adoption. If you adopt (or give birth to) a child, you can withdraw funds from your IRA if it’s within the first year after the date when the adoption was finalized (or the baby’s birth date). The maximum amount that you can withdraw is $5,000 per adoption or birth.

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When Can You Take Money Out of an IRA?

You can take money out of an IRA anytime. But taking money out of an IRA prior to reaching age 59 1/2 and failure to meet certain IRS exceptions will result in a 10 % penalty tax on the amount withdrawn. Additionally, traditional IRA distributions exist as taxable income. Any disbursement by your brokerage will be reported to the IRS within the tax year when it was disbursed, so it’s important to remember to claim it as income when you file your annual tax return as well.

It’s not a matter of when you can take money out of an IRA, it’s a matter of how much in taxes and penalties you’ll pay if you take money out of your IRA at the wrong time.

6. In kind withdrawals qualify as RMDs

Don’t want to sell your assets? It’s easier to take withdrawals in cash, but that doesn’t mean you have to — or should. So-called in-kind distributions are taken out in the form of stocks or bonds, and they may make more sense for people who want to keep assets for various reasons. You’ll simply move the assets from your IRA into a taxable account. These in-kind withdrawals will be assigned a fair market value on the date they are moved.

An in-kind withdrawal may be easier and less expensive than triggering fees by selling the securities in the IRA and buying them back in a brokerage account.

How Much Can I Contribute to an IRA at Age 55?

In 2022, the contribution limit for someone over age 50 is $7,000: a regular contribution of $6,000 plus a catch-up contribution of $1,000. To contribute the full amount to a Roth IRA, your modified adjusted gross income (MAGI) must be under $129,000 if you are a single filer or less than $204,000 if you are married filing jointly. As your income rises, the amount that you can contribute is reduced and eventually phased out.

3. Know how to take distributions

If you have several retirement accounts because of frequent job changes and you’re approaching retirement, you now have the task of figuring out how to withdraw the money.

Will you have to tap all of your accounts? Probably not.

If you own a handful of traditional IRAs, you can withdraw from each of them. But the more efficient move may be to add the assets from all your accounts and take one withdrawal from a single IRA.

Consolidating IRAs into a single account can simplify paperwork, make it easier to compute future withdrawals and gain greater control over your asset allocation, Slott says.

However, you can’t make withdrawals from an IRA to meet your RMD requirements for a 403(b), 401(k) or another plan.

It’s vital to note that 401(k) plans can’t be pooled to compute a single RMD, says George Jones, managing editor Wolters Kluwer Tax & Accounting. To streamline those, roll them into an IRA.

Losing compound earnings

Finally, if you borrow or withdraw your retirement savings, you’ll lose out on the power of compounding, where interest earned on your savings is reinvested, and in turn, generates more earnings. You’ll lose out on any gains those funds would have earned for you, which over a couple of decades could add up to tens or hundreds of thousands of dollars in lost income.

The Best Time to Take Money Out of an IRA

As the name implies, the best time to take money out of an IRA complies with a smart withdrawal plan. A smart, comprehensive withdrawal plan addresses expected annual income each year in retirement and the starting date of Social Security, considers pensions and any other sources of income, and then estimates your tax situation in retirement. All information combines to decide in which years larger or smaller IRA withdrawals should be taken.

401(k) plan and IRA withdrawals

Many 401(k) plans allow hardship withdrawals to pay for certain medical or higher-education expenses, funerals, buying or repairing your home, or fees to prevent eviction or foreclosure. You’ll owe income tax on these types of withdrawals as well as the potential 10 percent penalty, and your deferral contributions will be suspended.

Unlike employer plans, with Traditional IRAs, you’re allowed to withdraw from this account at any time for any reason. However, you’ll pay income tax on the withdrawal and often the 10 percent penalty as well if you’re under the age of 59 1/2.

With Roth IRAs, you can withdraw contributions at any time, since they’ve already been taxed. However, if you withdraw interest earnings before age 59 1/2 and your Roth IRA has not been opened for five years, you’ll likely face that 10 percent penalty and owe taxes on the earnings.

How to Withdraw From a Roth IRA Early Penalty-Free

While Roth IRAs are not intended to be a savings account, Roth IRAs do allow you to withdraw funds without the 10% early withdrawal penalty — but only for a number of exceptions. 

If you meet the five-year rule, you won’t pay taxes on these withdrawals if you’re over 59 ½. But if your account is younger than five years, you’ll be responsible for income taxes on the earnings portion (not the contribution portion, which never has taxes or penalties) of your withdrawal. 

Here are some of the exceptions to the early withdrawal rules.

First-Time Home Buyer

You can be considered a first-time homebuyer if you or your spouse haven’t owned a home in the previous two years. In that case, you’re eligible to withdraw up to $10,000 from your Roth IRA to buy, build, or rebuild a home. You’re also able to use the money for a parent, child, or grandchild who fulfills the first-time homebuyer criteria. 

Note that $10,000 is a lifetime maximum. And once you have the money, you have 120 days to spend it on eligible expenses.  

Higher Education Expenses

You can withdraw up to the amount of your yearly higher education expenses for yourself, spouse, children, grandchildren, or great grandchildren to pay for qualified expenses at a college, university, post-secondary educational or vocational school, including: 

  • Tuition
  • Fees
  • Books
  • Supplies
  • Room and board (if you’re enrolled at least half-time)
  • Any other required equipment or materials

While your Roth IRA (and other retirement accounts) aren’t counted to calculate your financial aid, withdrawals do count as income and could reduce the amount you receive. Because of this, be sure to run the numbers and make sure it’s worth it before you take the funds.

Other exceptions

According to the IRS, there are a number of other exceptions, including: 

  • Total and permanent disability 
  • Unreimbursed medical expenses that exceed 10% of your adjusted gross income 
  • Health insurance premiums if you’re unemployed
  • Qualified expenses related to birth or adoption, up to $5,000
  • Qualified disaster recovery
  • Military leave of at least 180 days
  • IRS levy 
  • Death
  • And a few other specific reasons

If you really need to grab your money and have one of these reasons, you can avoid the 10% penalty. 

If you’re really in a bind, you can withdraw your contributions for a short time and redeposit them within 60 days to avoid penalties. You’ll lose out on earning interest, but if you’re fast, you can get the money back in and keep your Roth IRA contribution limit intact. 

This only works if you withdraw your contributions — not your earnings. Keep in mind, you have until tax day of the following year to make contributions for the current year up to the annual limit. If you withdraw contributions from previous tax years, you have 60 days to return the funds to avoid penalties. 

Consult with a tax professional to see if taxes or penalties would apply for your situation or if you’d be eligible for any exceptions. If you do make an emergency withdrawal, you’ll need to report it on IRS Form 8606 as part of filing your tax return. 

Required minimum distributions

How much must I take out of my IRA at age 70 1/2?

Required minimum distributions (RMDs) must be taken each year beginning with the year you turn age 72 (70 ½ if you turn 70 ½ in 2019). The RMD for each year is calculated by dividing the IRA account balance as of December 31 of the prior year by the applicable distribution period or life expectancy. Use the Tables in Appendix B of Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). RMDs are not required for your Roth IRA. See the discussion of required minimum distributions and worksheets to calculate the required amount.

I am over age 70 ½. Must I receive required minimum distributions from a SEP-IRA or SIMPLE-IRA if I am still working?

Both business owners and employees over age 70 1/2 must take required minimum distributions from a SEP-IRA or SIMPLE-IRA. There is no exception for non-owners who have not retired. The SECURE Act made major changes to the RMD rules. For plan participants and IRA owners who reach the age of 70 ½ in 2019, the prior rule applies and the first RMD must start by April 1, 2020. For plan participants and IRA owners who reach age 70 ½ in 2020, the first RMD must start by April 1 of the year after the plan participant or IRA owner reaches 72.

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