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Between the ages of 59 1/2 and 70 1/2, you can withdraw as much or as little as you want from your IRA account. Any withdrawals made prior to or after that period should carefully be considered to avoid income tax complications. The Internal Revenue Service has strict requirements and penalties that govern rollovers and distributions. Banks may also impose penalties for withdrawals of non-matured time deposits.

Although the ideal withdrawal schedule should be tailored to your personal situation, you can avoid potential problems by keeping in mind a few general guidelines.

The Early Bird Gets the Tax Penalty

Early IRA distributions (before age 59 1/2) are usually subject to a 10% penalty. This rule also usually applies to KEOGH plans, 401(k) plans, most company pensions and tax-deferred annuities. But, you may qualify under one of these exceptions:

  • Funds are used for qualifying first time home purchase expenses
  • Funds are used to pay qualifying higher education expenses
  • If you are removing either a regular or excess contribution, including attributable earnings, prior to your tax filing due date
  • If the proceeds cover medical expenses higher than 7 1/2 percent of your Modified Adjusted Gross Income (does not apply to IRAs)
  • If you are an employee who was separated from service during or after the calendar year that you turn 55 years old
  • If the distribution fulfills a domestic court order, such as a property settlement in a divorce

When you retire or change jobs, you can use an IRA rollover to tax shelter a lump sum distribution from a pension or profit-sharing plan.

Lump sum distributions from a pension plan are subject to a 20% withholding tax. You can avoid withholding by leaving the money in your former employer's plan (where permissible) or by transferring funds directly to an IRA or other qualified plan. If you cash out your plan, 20% will be withheld and you will get only 80%. But if you invest an amount equal to your entire distribution (including the 20% withheld) in an IRA or other qualified plan within 60 days, you may be eligible for a refund of the amount withheld when you file your income tax return.

If you need some of the funds, consider a partial rollover to defer taxes and avoid possible penalties on the amount you do roll over.

Consider Averaging

"Averaging" is a tax break on lump sum distributions from qualified retirement plans. You pay the tax in one year, but it is calculated as if you received the income over ten years. Averaging can only be used once and may not be used for distributions from an IRA. (There are restrictions to averaging. Consult your tax advisor for full details.)

It Doesn't Pay to Delay

Although less common than early withdrawals, "inadequate" IRA withdrawals after the age of 70 1/2 can cause costly tax complications. You must withdraw a minimum required amount by April 1 of the year after you turn 70 1/2 or pay a 50% excess accumulation penalty on the amount that should have been withdrawn. Minimum withdrawal amounts are based on life expectancy tables for you and your beneficiary.

In subsequent years, withdrawals must be made by December 31 to avoid further penalty. Depending on the timing of your first withdrawal, you may be forced to take two withdrawals in one year which could place you in a higher tax bracket.

The rules governing IRA withdrawals are complex, so be sure to consult a professional such as your accountant, attorney or tax advisor.

For more information, you may obtain a copy of Publication 590, "Individual Retirement Arrangements," free of charge from the Internal Revenue Service. Call 1-800-TAX-FORM or visit online at

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