Changes To Ira Withdrawal Rules
IRA withdrawal rules are those that govern how an account holder can take money from his IRA and the possible tax penalties that apply if the he happens to violate those withdrawal rules. Different IRA retirement plans follow different withdrawal rules. New IRA withdrawal rules require that a person older than 70.5 should withdraw a portion from his retirement accounts each year. The money withdrew is treated as an ordinary income and taxed accordingly. If the person fails to take at least the minimum required withdrawal amount each year, he will incur a 50% penalty.
For Traditional IRAs, a person can only make withdrawal from his IRA account until he reaches the age of 59.5, otherwise he will incur a 10% additional tax penalty. In addition, minimum distribution rules (MDR) for Traditional IRAs begin starting at the age of 70.5. The amount that a person can withdraw is calculated using a life expectancy table in such a way that the balance in the IRA account would be zero when the person reaches his life expectancy age.
For Roth IRA withdrawals, a person is also required to reach the age of 59.5 years before he can make a qualified distribution. A qualified distribution can be done after the five taxable year period starting with the first year for which a contribution was made to a Roth IRA. However there are exemptions. A person, even if he is not yet 59.5 years old, can still make a withdrawal if he become disabled due to accident or any fortuitous event, or if he plans to use the money to buy his first home. Unlike the Traditional IRAs, Roth IRAs are not subject to minimum distribution rules.
Withdrawal rules for SIMPLE IRAs generally follow those rules that govern Traditional IRAs, including exceptions. Though, the two-year period withdrawal rule is unique to SIMPLE IRAs. The two-year period starts on the exact date that a person first participated in a SIMPLE IRA plan. If the account holder decides to take an early withdrawal within this two-year period, then the additional tax penalty is raised from 10% to 25%.
In December 10, 2008, the US House of Representatives approved the Worker, Retiree, and Employer Recovery Act of 2008. Then on December 23, 2008, the then President George Bush signed the Act into law. The new law contains provisions related to retirement plans and temporary changes to IRA withdrawal rules.
New IRA withdrawal rules for 2009 suspend mandatory distributions for the said year. The new law applies to IRA account holders, regardless of their total retirement account balance, and to beneficiaries of IRA owners. In 2010, IRA account holders whose over the age 70.5, along with those individuals who have inherited traditional IRAs or 401k IRAs, need to resume taking withdrawals from their tax-deferred retirement accounts.
