What Are the Rules for Cashing in an IRA?
IRAs are long-term savings tools that give your money time to grow in investments. In general, withdrawals without incurring penalties can begin prior to age 59 1/2.
Usually, withdrawing money before turning age 59 12 incurs an early withdrawal penalty of 10% plus income tax. There may be exceptions such as medical expenses or buying your first home.
In-Kind Distributions
In-kind distributions allow you to move tax-advantaged retirement account investments directly into a taxable investment account such as a brokerage account without incurring income tax and penalties on them. Depending on their nature, in-kind distributions could help avoid liquidating these assets which could incur income taxes and penalties upon their sale.
As long as you meet your required minimum distribution (RMD) from a traditional, SEP, SIMPLE or self-employed IRA you will owe income taxes on their fair market value once transferred to your taxable account.
Consider using in-kind RMDs only if you need the cash to pay your taxes without selling investments; otherwise it would likely be best to opt for an IRA rollover to avoid penalties. Be wary though; if you miss the 60-day deadline for withdrawing money, not only will income taxes and early withdrawal penalties apply but you also lose any chance to reinvest and reap additional tax-deferred growth benefits from reinvested savings.
In-Kind Withdrawals
Though the IRS doesn’t force you to sell investment shares for cash in your IRA, in-kind distributions provide another method for moving investments between accounts held with one financial institution without having to sell for cash and then repurchase securities again – usually less expensive and tax efficient than liquidating and then repurchasing assets in this manner.
In-kind distributions may also prove useful if you need to withdraw funds from your IRA prior to reaching age 59 1/2, and would like to avoid paying income taxes and the 10% penalty. Withdrawals should only be used for expenses related to qualified expenses or hardship reasons.
Other examples of in-kind withdrawals could include purchasing your first home, qualifying higher education expenses (tuition fees, books and supplies) and unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. According to IRS rules, you must use these distributions within 120 days or risk losing their penalty-free status.
Cash Withdrawals
Your IRA allows you to withdraw funds at any time, provided they meet IRS withdrawal regulations. These vary based on age and whether it’s a traditional or Roth account – failure to follow them could incur penalties.
As an example, any money withdrawn from an IRA prior to turning 59 1/2 will incur an early withdrawal penalty of 10% in addition to income taxes that are due.
One exception to the penalty applies if your distribution is used to purchase, build, or renovate a first home – either yours or that of your spouse or children.
Required minimum distributions (RMDs), also known as mandatory withdrawals from an Individual Retirement Account (IRA), must also begin by April 1 of the year following 70 1/2. This government rule ensures your IRA funds don’t become subject to taxes indefinitely. Your plan or IRA administrator should provide your RMD amount each year; alternatively you may use an RMD calculator Opens in new tab to figure out exactly how much must be withheld each year.
Taxes
When withdrawing money from an IRA, your taxes and penalties depend on its type. Withdrawals from traditional, SEP and SIMPLE IRAs will typically be taxed as ordinary income at your marginal tax rate; while withdrawals from Roth IRAs typically result in tax-free withdrawals.
Your withdrawals from a traditional IRA depend on whether or not your contributions were pre-tax, in which case the IRS will charge at your 22% marginal tax rate on earnings that are withdrawn.
Some IRA withdrawals may be tax-free, such as when used to assist first-time homebuyers (up to $10,000 per person) or qualify disability expenses. You may also be able to take substantially equal periodic payments without penalty following one of three IRS-preapproved methods; but for successful tax-free IRA withdrawals it requires careful planning, and as a Thrivent financial advisor will advise before any major decisions are made.
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