Traditional IRAs: When can I use my savings without penalties?

Tradiitonal Ira Rules

Traditional IRAs are retirement accounts that let you make tax-deferred contributions. In most cases, you won’t pay a penalty if you withdraw from an IRA after age 59½. Unless you’re exempt, you’ll have to pay a 10% income tax penalty on early withdrawals taken from your IRA before you turn 59½.

Table of Contents

  1. Withdrawal Rules
  2. Exceptions to Withdrawal Rules
  3. Bottom Line

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Withdrawal Rules

It’s important to understand traditional IRA (individual retirement account) withdrawal rules when you’re planning for retirement because they depend on your age and life conditions. Generally, you’ll face additional fees if you withdraw early and will be required to take minimum distributions when you reach a certain age.

Age 59½ and under

Early distributions made from your IRA account before you reach age 59½ are subject to an early withdrawal penalty. If you take withdrawals and aren’t exempt, you’ll need to pay taxes on the withdrawal. It’ll be treated as gross income and the IRS will assess an additional 10% tax penalty.

If you want to save for retirement but don’t want to pay the early withdrawal penalty, Public’s long-term portfolio can help you lock in investments for the long term. Since it’s not an IRA, you can withdraw funds from your Public account at any point without paying an early withdrawal penalty.

Age 59½ and over

Distributions taken once you’re older than 59½ are treated as regular taxable income. You won’t pay a penalty but you will need to pay federal income tax, as well as any required state taxes.

Age 72 and over

Once you turn 72, you’ll need to take required minimum distributions (RMDs) from your traditional IRA funds. Your RMDs are calculated by dividing the value of the traditional IRA by a life expectancy factor, which is calculated by the IRS. If you don’t take your RMD, you’ll need to pay a 50% penalty on the amount you should have taken.

You’re required to take RMDs because traditional IRA contributions are tax-deferred, meaning that you need to ultimately pay taxes on the funds. If you want to avoid RMDs, consider a Roth IRA, which isn’t subject to required minimum IRA distributions.

Exceptions to Withdrawal Rules

There are several exceptions to the 10% penalty on early withdrawals. Make sure you consult with a tax professional before claiming exemptions. Some common exceptions include:

  • Birth/adoption: New parents can take $5,000 from their IRA to pay for birth or adoption expenses without paying a penalty.
  • Disability/death: Disabled individuals can withdraw without a penalty. If you die, or if you inherited IRA funds, you can withdraw it without a penalty.
  • First-time home purchase: Depending on the kind of home purchase, you’ll get a lifetime limit of $10,000 to withdraw without a penalty.
  • Health insurance: Unemployed individuals can withdraw funds to cover health insurance premiums.
  • Educational expenses: Qualified higher education expenses for you and your immediate family are eligible.
  • Involuntary distributions: You don’t pay a penalty if your distributions are the result of an IRS tax levy.
  • Medical expenses: You can avoid the early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI).
  • Periodic payments: If you choose to take Substantially Equal Periodic Payments (SEPP), you can avoid the early withdrawal penalty. Not all brokerages offer this and you should consult with a tax advisor before starting to withdraw.
  • Reservist distributions: National Guard members and reservists can usually take distributions if they are put on active duty for at least half a year.
  • Rollovers: If you withdraw to roll over into another retirement account, you won’t be subject to the penalty but may have to pay income tax.

Bottom Line

Traditional IRAs can help you build wealth by offering access to tax-deferred retirement savings. As long as you don’t exceed your annual contribution limit and meet eligibility requirements, you can build retirement savings and claim tax deductions. However, if you need to withdraw early, you may face a 10% tax penalty.

If you want to expand your investing strategy, consider Public’s investment account. Since it isn’t an IRA, you can save for retirement without facing tax penalties for early withdrawals. And with Public Premium, you’ll get access to insights from Morningstar that can help you craft a more diverse and resilient portfolio.

Save money and build wealth by avoiding traditional IRA early withdrawal penalties.

Public can help you save for retirement by structuring your portfolio for the long term.

Sign up for free

Frequently asked questions

Is withdrawing money from a Traditional IRA penalty free?

You can withdraw money from a traditional IRA without paying a penalty if you’re over 59½. There are also other life circumstances that let you withdraw without a penalty.

Are withdrawals from a traditional IRA tax-free?

No, contributions to a traditional IRA are tax-deferred, not tax free. While you can withdraw from a traditional IRA without a penalty once you turn 59½, you’ll still have to pay taxes on those distributions.

Can I take money from my traditional IRA while I am still working?

Distributions from a traditional IRA are based on age and life conditions, not working status. The only exception to this is if you want to take penalty-free distributions to pay your healthcare premiums—you need to be unemployed for at least 12 weeks before using this benefit.

What is the required minimum distribution?

You can calculate your RMD by dividing your IRA’s account balance by a life expectancy value, which is determined by the IRS.

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