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Your Bank > Education and Advice > CNB University

I Need Money: Can I Take Funds from My IRA?

M Mazzochetti 2014
Mark S. Mazzochetti, CISP is Vice President - Retirement Services Officer and can be reached at MMazzochetti@CNBank.com or (585) 419-0670 x50606.

Yes, but the taxable portion of your distribution may be subject to a 10 percent penalty for early withdrawal if you're not yet age 59½. If you are 59½ or older and take money from your traditional IRA, you will not be assessed a penalty, though you may still have to pay income tax on all or part of the distribution. The purpose of this premature distribution tax is to discourage you from exhausting your IRA savings too soon. However, the penalty can be a significant drawback if you need money to meet unexpected expenses.

If you are experiencing a cash crunch, it's usually better to draw on other investments before dipping into your IRA. However, if your IRA is your only sizable asset, you may have no choice. If that's the case, be aware that there are a number of exceptions to the premature distribution rule.

If you are disabled, you are exempt from the penalty, as long as you meet the IRS definition of disability. If an IRA owner dies before reaching age 59½, and you are a beneficiary of the account, distributions that you receive are exempt. If you need supplementary income, you can take IRA distributions as a series of "substantially equal payments" over your life expectancy or the joint life expectancy of you and your beneficiary. These distributions may avoid the penalty as long as you don't modify the payments within certain time frames.

Subject to limits and conditions, the penalty tax generally will not apply to IRA distributions taken to pay qualifying medical expenses, health insurance premiums while you're unemployed, higher education costs, and qualified first-time home-buyer expenses (up to $10,000 lifetime from all your IRAs). It also does not apply to amounts rolled over from one IRA to another (assuming you follow the rules for rollovers), to conversions of traditional IRAs to Roth IRAs, to amounts that the IRS levies from your IRA to cover your tax bill, or to qualified reservist distributions. Other exceptions may also apply.

Qualified distributions from your Roth IRAs are federal income tax--and penalty tax--free. Distributions are qualified if you satisfy a five-year holding period, and you are (a) age 59½, (b) disabled, (c) deceased, or (d) you have qualified first time home-buyer expenses. The taxable portion of nonqualified distributions from your Roth IRAs is subject to the same 10 percent penalty rules that apply to traditional IRAs. (Special rules may apply if you take a nonqualified distribution from your Roth IRA within five years of a conversion.)

Finally, education IRAs may be subject to special rules of their own.

How CNB Can Help

If you would like to discuss in more detail, I am available to answer any questions you may have. Please call me today at (585) 419-0670, ext. 50606 or MMazzochetti@CNBank.com.


Source: ©2016 Broadridge Investor Communication Solutions, Inc. This material provided by Mark Mazzochetti, CISP.

 

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.

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