Rules for Cashing in an IRA

Anyone earning an income can open an IRA to save for retirement, investing their dollars in stocks, bonds, exchange-traded funds and certificates of deposit.

However, the IRS frowns upon early withdrawals of an IRA before reaching retirement age; such withdrawals typically incur both income taxes and a 10% penalty, subject to certain exceptions.

Rules for Early Withdrawals

The IRS lays down rules regarding withdrawal of funds from an IRA, and will take swift action if you violate them.

For example, the government imposes a 10% early withdrawal penalty on money you withdraw from an IRA before age 59 1/2 – this penalty must also be added onto any income taxes you owe on it.

One exception to this rule can occur if you withdraw money from your IRA to use as a down payment on a first-time home purchase within two years and withdraw up to $10,000 from an IRA account.

Self-employed and small business owners may withdraw from their traditional IRA without incurring taxes or the 10% penalty, provided their required minimum distribution (RMD) occurs by April 1 of the year after turning age 72. Otherwise, a 50% excise tax would apply on any money left unwithdrawn that should have been distributed but wasn’t.

Rules for Rollovers

If you receive a distribution from an employer plan and wish to convert it to an IRA without incurring taxes or penalties, this is possible without incurring taxes or penalties; however, the IRS limits each rolling 12-month period only one IRA-to-IRA rollover.

Direct transfers offer the easiest and least-risky solution to rolling over an account, as this process ensures your money goes directly from one plan to another without being considered distributions by the IRS.

An indirect rollover may also be an option; this involves writing out a check to yourself but then having it deposited directly into the new account. This method can help if you require funds quickly but want to meet your 60-day deadline (IRC 408(d)(3)). However, this rule doesn’t apply between traditional, Roth, or SIMPLE IRA accounts; each type must adhere to annual contribution limits accordingly.

Rules for In-Kind Distributions

Typically, withdrawing money from retirement accounts before age 59 1/2 incurs a 10% penalty plus income taxes; however, in certain instances you can still access them without incurring such penalties.

By taking in-kind distributions from your IRA, for example, you can avoid penalties by moving stocks, mutual funds or other assets into a taxable investment account like a brokerage account on the date of transfer – the value recorded here reflects their market close price on that day.

Once you reach the age of 72 (or 70 if born before July 1, 1949), an RMD requires that an annual withdrawal be taken from an IRA, whether traditional, SEP-IRA, SIMPLE IRA or Roth. You can calculate this by dividing your Dec 31 account balance by its estimated life expectancy as calculated by the IRS.

Rules for Distributions to Beneficiaries

Idealistically, it would be wise to keep your money in an IRA until it’s time for its use – this allows for tax-deferred growth over decades. But there may be reasons to tap into your IRA early; just be wary of any restrictions placed on you when doing so.

As a beneficiary of an IRA who takes out distributions, your required minimum distribution (RMD) schedule will be based on your age at the time of account owner’s death and you must also follow other applicable rules (e.g. for inherited IRAs and 10-year rule for specific individuals).

The SECURE Act passed in December 2019 restricts the ability to create stretch IRAs – where post-death distributions are spread over an individual beneficiary’s life expectancy – but there are ways around it, including moving assets to an IRA that permits single life expectancy distributions or designating a trust as beneficiary.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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