What Are the Rules for Cashing in an IRA?

Cashing in an IRA may seem complex and intimidating, but with assistance from Thrivent financial advisors you’ll be better equipped to make smart withdrawal decisions.

At some point, you will be required to withdraw a minimum amount from your IRA each year – this is known as your “Required Minimum Distribution,” or RMD.

1. You must be at least age 5912

As you age, the IRS becomes increasingly anxious that you take required minimum distributions from your IRA at least annually (known as required minimum distributions). The amount to withdraw each year is calculated based on both account balance and life expectancy – you can take more or less than this minimum withdrawal requirement depending on whether it applies to traditional, SEP-IRA, SIMPLE-IRAs, or retirement plan accounts.

However, there are exceptions to this rule, such as using your funds for medical expenses, purchasing a home or in case of death or disability. If in doubt about whether your particular circumstances qualify or not, seek professional guidance and consult an accountant or tax professional before withdrawing money from an account. Otherwise you’ll owe income taxes as usual as well as an IRS 10% penalty fee; so don’t break the rules!

2. You must have owned the account for at least five years

Roth IRAs require a shorter holding period, starting the date you converted funds from non-Roth accounts into Roth. However, the rules are more complicated as you must also fulfill several additional criteria to satisfy them.

After reaching age 72, the IRS becomes suspicious and requires you to start withdrawing money (known as required minimum distributions ). Otherwise, they impose severe penalties.

There may be exceptions to the five-year rule, such as medical expenses or being called up to active duty as a qualified reservist or National Guard member, but in general it’s wiser to leave IRA funds invested until retirement rather than using them for short-term expenses or charges that reduce returns and reduce what will remain available at retirement time. When looking for an IRA provider with low fees it may help.

3. You must have made at least one contribution

An Individual Retirement Account, or IRA, provides tax breaks to encourage savings for retirement and is open to anyone with earned income – even those without access to an employer-sponsored plan such as 401(k).

An IRA can be an excellent complement to a 401(k) or pension, giving you greater investment options and the freedom to save towards your goals in any manner that works for you. But the IRS imposes certain rules if you wish to withdraw early without incurring penalties.

Traditional IRA withdrawals taken before age 59 1/2 will generally be included in your gross income and subject to a 10% penalty; however, there may be exceptions and it’s wise to consult a tax professional prior to making withdrawals or distributions from an IRA.

4. You must have made at least one withdrawal

Before withdrawing any money from an IRA, at least the minimum required by the IRS must be taken out as part of its required minimum distribution (RMD) calculation. This amount varies based on factors like age, account balance and life expectancy factors set by the IRS.

Withdrawals made before age 59 1/2 may be subject to ordinary income taxes and an early withdrawal penalty of 10%; exceptions include purchasing your first home, covering unreimbursed medical expenses or using money towards qualified higher education expenses.

If you inherit an IRA or retirement account from someone who passed away, RMDs must begin being taken out by April 1 of the year following when you turn 72 (73 if turning that age after December 31, 2023). RMDs may be taken as either one lump sum payment or in installments spread throughout your lifespan.

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