- If you hold money in a traditional IRA, you must pay taxes on the money you withdraw. You can start withdrawing that money without penalty at age 59 1/2, but you still must pay ordinary income taxes on the funds. Traditional IRA distributions are taxed at your ordinary income tax bracket, and the money is simply added to your other income when you complete your 1040 form each year.
- If you have money in a Roth IRA, you do not have to pay taxes when you withdraw it. The money you take out of a Roth IRA is tax-free, making that account a good choice for younger workers and for those who expect tax rates to be higher in the future than they are now. If you have money in both a traditional and a Roth IRA, it is a good idea to assess the tax consequences of withdrawing from one versus the other.
- It is important to keep in mind that your taxes are based on your total income, not just the amount you pull from your IRA. The amount you take out of your IRA is taxed at your ordinary income rate, just like your wages, interest and dividends. If this is your first year pulling money from an IRA, run the numbers and determine how much additional tax you might owe. That gives you time to save your money, instead of being hit with an unexpected tax bill on April 15.
- You are permitted to begin taking money from your IRA when you reach age 59 1/2, but you are not required to do so. But when you reach age 70 1/2, you are required to withdraw a certain amount from your traditional IRA. This required minimum distribution goes into effect the year you turn 70 1/2 and continues every year thereafter. The amount you must take out is determined using a formula that includes the balance of the account, your age and your life expectancy. If you fail to take your required minimum distribution, you are subject to a tax equal to 50 percent of the amount you should have withdrawn from the IRA.
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