An IRA (Individual Retirement Account) can be a fantastic option for saving money leading up to your retirement. However, as with many different kinds of specialized accounts, there are some specific rules that you need to know if you want to use the account to its full effectiveness.
An Individual Retirement Account is a great asset, but you need to understand how it works if you want to use it properly. But what are the withdrawal rules for an IRA, and how often do they come into play?
What is an IRA?
In simple terms, an Individual Retirement Account is a tax-advantaged account for saving money on the road to retirement. Naturally, this does not act like a normal account, which means that you can’t just withdraw your money freely at any time.
While there are multiple kinds of IRAs, the general idea is that you are investing in tax-deferred savings options but are limited in how and when you can use the money. Regular and Roth IRAs operate in different ways, but their purpose is still the same.
What are the rules for IRA Withdrawals?
You are allowed to take distributions from your IRA at any time without needing to go through any specific obstacles to approve it. However, any withdrawals taken before you hit the retirement threshold of 59.5 years of age have a 10% penalty and are taxable.
This means that withdrawing before you are meant to will lose you some of the money and remove the nontaxable benefits of that money. However, withdrawing past that age has no penalty.
Notably, once you hit 73 years of age, you must start to withdraw certain amounts annually. This means that you are eventually forced to use the money in your account, even if you have other savings to keep you going anyway. These amounts vary based on a range of factors.
Properly understanding withdrawal rules is important for using your IRA in a way that benefits you best, so make sure that you look into the specifics beforehand. The more you know, the easier it is to ensure you are withdrawing correctly and avoiding penalties.
Why Does This Matter?
IRAs are meant as retirement savings accounts, which means that they are not meant to incentivize people to withdraw money from them before retirement age. As you might expect, these rules are in place to prevent people from using the IRA as a normal savings account.
If you withdraw from your IRA early or do it in a way that goes against the intended uses of the account, you will often get penalties. Even just a 10% reduction in the money you withdraw can be a significant amount, so it is important to understand when you should and should not withdraw.
Remember that there are also numerous other rules to consider, many of which may be related to how the account works or how your money is taxed. The more you know about these accounts and the systems behind them, the smarter you can be with your retirement savings.
