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.
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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with Roth IRAs your money is taxed upfront, while with a traditional IRA your money is taxed on the back end, when it’s withdrawn in retirement.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.

About Author
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Richard Barrington
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).