You’ve worked hard to save money for retirement, now it’s time for a distribution. Taking a distribution depends on the type of retirement account that you have.
During retirement, the Roth IRA offers far greater flexibility and simplicity in planning distributions. There are no elections to be made when you reach age 70 1/2. There are no mandatory distributions and no tax penalties for allowing the account to grow undisturbed, tax-free. The taxation of a Roth IRA distribution depends on whether the distribution is considered qualified or nonqualified.
Qualified Distributions from a Roth IRA may be withdrawn tax- and penalty-free. To be considered qualified, the IRA must have been open for a minimum of five years (beginning with the first year for which the contribution was made) and the withdrawal must be made after one of these events:
- Attainment of age 59 1/2
- Disability
- First time home purchase
- Death
- Education expenses
Nonqualified Distributions from a Roth IRA do not meet the requirements for a qualified distribution. In a nonqualified distribution, the "contributory basis" are distributed first and are tax- and penalty-free. The "earnings" portion are distributed next, and are subject to taxes and a 10% early distribution penalty.
The Required Minimum Distribution (RMD) for a Traditional IRA begins in the calendar year in which the individual attains age 70 1/2.
Penalty-Free Withdrawals on a Traditional IRA before the owner reaches 59 1/2 generally have a 10% IRS penalty. Exceptions for distributions to be penalty-free are:
- Death
- Disability
- Higher education expenses
- First-time home purchase
- Medical expenses
