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IRA Withdrawal Rules: Distributions From a Traditional IRA

Someone handing over a bag of money

  |  By Matthew White, CISP

Saving for your retirement with a tax-advantaged account, like a traditional IRA, is one of the most important steps you can take in planning for retirement. Another equally important step is making sure you work with financial and tax professionals to develop a plan for how you will make withdrawals from your traditional IRA.

Traditional IRAs allow you to defer taxes until you begin to take distributions. But it’s important to understand IRA withdrawal rules so you can fund your retirement while also minimizing tax implications. In addition, nuances are involved when taking withdrawals from traditional self-directed IRAs because they are typically invested in alternative assets that may not be easily liquidated.

Here is a look at traditional IRA withdrawal rules, which vary based on your age:

Traditional IRA withdrawals prior to 59½

Remember: The purpose of an IRA is to encourage long-term savings, so penalties may be involved if you pull funds out of your account prematurely. In general, if you take a distribution from your traditional IRA before the age of 59½, you must pay a 10% penalty tax on the amount of the withdrawal. The amount withdrawn must also be included in your taxable income for the year.

However, there are a number of situations – such as buying your first home, suffering a permanent disability or paying for unreimbursed medical expenses – that generally allow you to avoid an early withdrawal penalty. It’s best to consult IRS guidelines and work with a financial or tax advisor to see if your circumstances allow you to make a penalty-free withdrawal.

Traditional IRA withdrawal rules for those between ages 59½ to 70½

Once you turn 59½, you can start taking money out of your traditional IRA account without being subject to an early withdrawal penalty.

However, this doesn't mean you are free and clear when it comes to tax implications. You still need to pay any federal or state taxes that might be due. A financial or tax professional can help you determine when it makes the most sense to start taking your IRA distributions and how much you should withdrawal.

Traditional IRA withdrawal rules starting at age 70½

Beginning at age 70½, owners of traditional IRAs need to start taking required minimum distributions (RMDs). Required minimum distribution rules do not apply to Roth IRA accounts while the holder is alive. But investors who own traditional IRAs are required to remove a portion of assets from their IRA each year, starting at the age of 70½.

Your first RMD must be taken by April 1st of the year following the year in which you turn 70½. For all subsequent years, required minimum distributions must be taken by Dec. 31st.

There are significant penalties for not taking your RMD during the correct timeframe. If you fail to take your RMD or if you take less than the required minimum amount, you may be subject to a 50% excise tax on the amount not distributed as required.

IRA distribution nuances for self-directed accounts

Investors typically satisfy their RMDs using cash from an IRA. However, RMDs and distributions in general can be trickier for investors who own a traditional self-directed IRA that is invested in an illiquid asset such as real estate or private stock. The typical solution is to take the "distribution in-kind."

For instance, if you own private stock and need to take a distribution but the stock cannot be sold for cash, you can take a distribution in-kind. This allows you to take your distribution in the form of private company stock rather than cash.

If your IRA owns real estate, you can also take a distribution in-kind, rather than being forced to sell property. You can distribute part of the property to yourself via grant deed, which effectively means your IRA will own part of the property and you will own the percentage that has been distributed.  

Distributions and RMDs for self-directed investors can be complicated and can also have severe tax consequences. To help add insight into the process, we’ve written a series of blogs on RMDs:

If you have questions about RMDs or taking an IRA withdrawal from your PENSCO self-directed IRA, you can contact us at 800.962.4238. The IRS also has an FAQ page addressing IRA withdrawals.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.