When Can I Withdraw from an IRA?

When can you withdraw from an IRA? Learn about IRA withdrawal rules including when they are penalty free and how to keep investing after retirement.
By Richard Barrington

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Retirement planning doesn't stop when you reach retirement.

In fact, one of the most crucial aspects of retirement planning kicks in once you retire. That's the decision of how quickly to draw money out of your retirement plan.

Take the example of an 80 year old with an IRA. At that age, people not only can access money from an IRA without penalty, but to some extent they are probably required to.

The tricky part is deciding just how much to take out of the IRA year by year. This means accounting for both IRA requirements and your spending needs.

This article will review the IRA rules and retirement budgeting basics involved in figuring out how quickly to take money out of an IRA.

What Is an IRA?

An IRA is an Individual Retirement Arrangement.

It's a type of retirement account set up on behalf of an individual. An IRA has tax advantages, but in return there are also rules to follow.

The rules depend on what type of IRA you have:

  • A traditional IRA offers a tax deduction on money you contribute to the plan. Investment earnings in the IRA are not taxed from year to year, but then all retirement withdrawals from the plan are taxed at your ordinary income rate.
  • A Roth IRA does not give you a tax deduction when you contribute money to it. However, investment earnings in the IRA are not taxed, and you do not owe any taxes when you take the money out in retirement.

Note that with Roth IRAs your money is taxed upfront, while with a traditional IRA your money is taxed on the back end, when it's withdrawn in retirement. This difference should factor into your strategy for withdrawing money from an IRA.

Here's one other thing about IRAs: they're designed to be drawn down over the course of a person's retirement. Because of this, at some point you are required to start taking money out of an IRA. Naturally, this also affects strategies for when and how much to withdraw from an IRA.

When Can You Withdraw from an IRA?

IRAs are designed specifically for retirement savings. They are not intended for providing tax breaks on savings for shorter-term needs.

Because of this, there are restrictions against withdrawing money from an IRA before you reach age 59 1/2.

  • If you withdraw money from a traditional IRA before you reach that age, you will probably face a 10% penalty. This is on top of any ordinary income tax you would owe on the amount withdrawn.
  • The amounts you contributed to a Roth IRA can generally be withdrawn without penalty any time after the plan has been in existence for five years. However, any investment earnings in the IRA that are withdrawn before age 59 1/2 would be subject to a 10% tax penalty.

Despite these restrictions, IRAs leave a fair amount of flexibility as to when you withdraw money in retirement. After all, 59 1/2 is on the early side for a retirement age.

Certainly, in terms of the example of an 80 year old with an IRA, that person would be able to withdraw money at any time and in any amount without incurring the 10% tax penalty.

However, just because you can withdraw money from an IRA doesn't mean that you should. Even after you pass age 59 1/2, there are still three things that affect the pace at which you should take money out of an IRA:

  1. Income tax considerations
  2. Required minimum distributions
  3. Conserving retirement resources

Each of these will be discussed in the sections that follow.

Income Tax Considerations

A crucial difference between traditional and Roth IRAs is that distributions from a traditional IRA in retirement are subject to ordinary income taxes. Roth IRA distributions are not.

If you have a traditional IRA, the amount of tax you pay on IRA distributions will depend on what tax bracket you're in. So, withdrawing too much at once could bump you into a higher tax bracket, causing you to pay more taxes.

Under most circumstances then, you might be wise to spread your IRA distributions out over the years to keep yourself in a fairly moderate tax bracket.

However, if you have other taxable income that varies from year to year, you might want to adjust your IRA distributions accordingly.

In a year when other income is high, you might want to take less money out of your IRA. That could keep you out of a higher tax bracket, and you shouldn't need as much from your IRA in a year like that anyway.

Conversely, in a year when other income is low you might boost your IRA withdrawals. This could help pick up the slack without pushing you into an overly high tax bracket.

The point is, if you have a traditional IRA be mindful of moderating the distributions to the extent possible to keep yourself out of higher tax bracket.

With a Roth IRA you don't have to worry about this because withdrawals are not subject to ordinary income taxes.

Required Minimum Distributions

Even if you don't immediately need money from your IRA to live on, once you reach age 72 you will probably have to start taking some out anyway.

Required minimum distributions (RMDs) are intended to make people draw down their IRA balances steadily over their remaining lifetimes beginning at age 72.

The rate at which you must make RMDs is generally based on a schedule designed to have you withdraw the remaining balance of your IRA out in equal increments over the remainder of your expected lifetime. That schedule may differ depending on your marital status.

Note that this schedule does not mean that your RMDs will be the same amount year-in and year-out. That's because the remaining value of your IRA may vary due to investment performance. Also, you may live longer than the average life expectancy.

Think of RMDs as setting a floor for the amount of your IRA withdrawals. You have to withdraw at least as much as the RMD schedule dictates, but if need be you can withdraw more.

Conserving Retirement Resources

As an example, the only formal constraint on an 80 year old's IRA distributions would be making sure they were at least enough to meet the RMD requirement. However, that 80 year old could withdraw more than that if desired - including the entire balance of the IRA.

Even so, some thought should be given to making retirement money last for the remainder of your life. That means two things:

  • While you are free to withdraw more than the RMD, keep in mind that spending at a faster rate now could leave you less money to live on in the future.
  • Even though you have to withdraw money from the IRA according to the RMD schedule, there's no rule that says you have to spend it all. While you will lose the tax benefit of the IRA once money is withdrawn, you can still save and invest some of it in a taxable account.

Conserving your retirement resources will give you a cushion for meeting future needs. These needs could change if you have a financial setback, if future expenses rise or if you live longer than expected.

Post-Retirement Investment Strategies

While you may begin taking money out of an IRA any time after age 59 1/2, you might still be investing that money for years to come. So, here are some things to consider in your post-retirement investment strategies:

Make cash ready to prepare for withdrawals

You should have some idea of when you will need to take money out of your IRA, for RMDs and/or spending needs. Make sure you have cash available in the account to make those withdrawals when the time comes.

Savings accounts or money market accounts are good for very near-term withdrawals. CDs can be used for those that are a little further out, because you can sync up those CDs so they mature just in advance of your scheduled withdrawals and earn higher CD rates in the meantime.

Keep some money in long-term assets

Life doesn't end at retirement, and neither does the need to invest for the future.

You may live for decades after you retire. So, while your asset mix might get more conservative, some portion of it should be invested for future growth and to keep up with inflation.

Many retirement plans and brokerage firms offer life cycle funds that gradually adjust the asset allocation as you get older. Robo advisors can help you do the same thing, or you can make that kind of adjustment yourself.

Set up an after-tax investment account for RMD amounts you don't need to spend

Don't feel you have to spend the entire amount of your RMDs. Saving some of it for the future may come in handy.

RMD money will have to leave your IRA, but you can set up an after-tax bank or brokerage account to keep it productively invested until you need it.

Even after retirement, financial planning is a long-term process. That means thinking ahead, and then adjusting to changes from year to year.

Frequently Asked Questions

Q: I've reached the age where I have to take mandatory distributions from my IRA. However, I think the amount I'm required to take is more than my yearly spending needs are going to be. How should I invest the excess amount of those distributions?

A: Once you reach age 70 1/2, you are required to start drawing down your IRA. The required minimum distribution is a function of your age and the amount in your IRA. If it turns out that the required minimum distribution is greater than your spending needs, think of this as a happy problem to have--it beats the alternative of the IRA not generating enough money to support you. Still, it does leave the problem of what to do with the excess distributions.

For starters, a money market account would be a logical place to deposit your IRA distributions. This would give you the flexibility to see how your spending patterns go in your retirement years without tying up your money. A money market account isn't as accessible as a checking account, but it would allow you monthly access plus the ability to make some additional withdrawals should unexpected needs arise.

A money market account may be a better choice than a traditional savings account because money market rates are typically higher than savings account rates, but be sure to shop around because money market rates can vary greatly.

If the amount in your money market account starts to accumulate because your IRA distributions continue to exceed your immediate needs, then think of the money market account as an emergency fund. However, once it exceeds six to twelve months worth of spending needs, it would be more than you'd likely need in an emergency. At that point, consider starting to invest some of your excess IRA distributions more aggressively, such as in a moderate-risk balanced mutual fund.

Q: I have $47,000 invested in an IRA. The new rate will be 0.80% starting this fall. I am unsure whether it would be best to roll this over for another year or switch it to a CD with a 0.80% rate for one year. What do you think?

A: Perhaps the key issue here is flexibility. This is not simply a question of whether to keep your money in an IRA, but also whether a one-year CD is the best vehicle for you at this juncture.

Here are some issues related to investment flexibility for you to think about:

  1. Is one year really the right time frame for you? It seems like under the circumstances you describe, you might benefit from going either longer or shorter. For example, some of the better savings accounts and money market accounts can provide you with a 0.80 percent interest rate, without locking you in for a year. That might prove useful if you believe that interest rates may rise in the near future, or if you anticipate a shorter-term liquidity need. On the other hand, if you don't need that kind of flexibility, why not go to a longer-term CD than one year, which would give you access to higher interest rates? The key there would be to look for a longer-term CD with a relatively low early withdrawal penalty, so you would not have to completely sacrifice flexibility for higher interest.
  2. Does your current IRA provider give you access to the best CD rates? It sounds as though you are already in a CD within your current IRA, and most other banks offering CDs can probably do so within an IRA account as well. So, if the issue motivating you is simply having the flexibility to shop for the best CD rates, you should be able to do that by transferring to an IRA at another bank once you find a rate you like.
  3. What would you gain by taking the money out of an IRA? Unless you have a traditional IRA and are at the age where you need to take required distributions (70 1/2), there seems little reason for you to incur the tax consequences of transferring out of an IRA. Since you have the flexibility to shop for rates within IRAs, is there a reason for you to give up the tax advantages?

Until you actually need the money, it's hard to see why you would move away from your IRA. In the meantime, the question is really about investment flexibility. This you should be able to achieve within an IRA, though it might mean choosing something other than a one-year CD -- or choosing another IRA provider.

Q: If you have an IRA but need the money now, is it best to wait until you are required to take distributions or start a little early? 

A: Fortunately, IRAs are designed to give you precisely this kind of flexibility. However, that flexibility means you are responsible for managing your IRA distributions effectively.

The following assumes you are talking about a traditional IRA, since you referred to eventually being required to take distributions. (Roth IRAs don't have minimum distribution requirements.)

Traditional IRAs, on the other hand, require their owners to start taking distributions once they reach age 70 1/2. That represents the latest you can start taking distributions, but traditional IRAs allow distributions without tax penalties once their owners reach age 59 1/2. So, since you are between those two ages, you have the option of choosing when to start taking distributions.

The IRS has various tables that dictate the minimum distribution requirements that start at age 70 1/2, and while these vary according to the particular situation, they are generally based on stretching those distributions out over your remaining lifespan.

Even if you start taking distributions before age 70 1/2, you would do well to take a cue from the IRS and plan distributions to last over your expected lifespan. This requires adjusting these planned distributions each year, as both the value of your IRA and your expected lifespan may change over time.

This approach will allow you to start distributions before required, but help you avoid taking out too much too soon. Any distributions you take before you are required cannot be counted toward the required distributions you will have to take later.

Besides helping stretch your money over your retirement, carefully planning IRA distributions helps you manage your asset allocation accordingly. As distributions approach, make sure that part of the IRA is in money market accounts, savings accounts or other similarly liquid vehicles so you do not have to interfere with long-term investments on short notice.

Finally, note that when people talk about IRA distributions without penalty, they are referring to the 10 percent penalty that is typically levied on distributions made before the age of 59 1/2. However, all traditional IRA distributions are subject to ordinary income tax, since they were deductible from income tax on the way in. In fact, that is what the minimum distribution requirement is all about -- it seeks to make sure that people pay tax on this money at some point during their lifetimes.

So, when contemplating what size distributions to take, consider what impact taxes will have on those distributions, and conversely, what impact those distributions may have on your tax liability.

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