- January 27, 2025
- Posted by General Electric Credit Union
- 6 read
Your Guide to Traditional IRA Withdrawal Rules
A traditional Individual Retirement Account (IRA) is a fantastic way to build tax-advantaged earnings for retirement. But can you withdraw funds from a traditional IRA? While your money isn’t completely locked away, there are specific rules and potential penalties to consider. In certain situations, it may be enticing—or necessary—to access your savings, so it’s important to understand these conditions to preserve the value of your retirement nest egg.
Be mindful of these 5 traditional IRA withdrawal rules
Rule 1: You must begin withdrawals by age 73.
A required minimum distribution (RMD) is the minimum amount you must withdraw annually from your traditional IRA, 401(k), or other tax-deferred retirement accounts once you reach a certain age. RMDs are mandated by the IRS to ensure that tax-deferred savings are eventually taxed, and the amount is based on your account balance and life expectancy.
Thanks to the SECURE Act 2.0, individuals born between 1951 and 1959 can wait until age 73 to begin taking RMDs from their traditional IRA. Those born in 1960 or later can wait until age 75. This change allows additional time for your savings to grow tax-deferred, which can benefit your long-term retirement goals.
Imagine Linda, who was born in 1955. Before the SECURE Act 2.0, she would have been required to start taking her RMDs at age 72, which could have been as soon as 2027. However, with the new rules, Linda can wait until age 73 to begin withdrawing funds from her traditional IRA or 401(k). This extra year allows her retirement savings to remain invested, potentially growing tax-deferred.
For example, if Linda’s account balance is $500,000 and earns an average annual return of 5%, waiting an additional year could grow her balance by approximately $25,000 before she begins her RMDs. This delay not only increases her overall savings but could also provide more flexibility in planning her retirement income and tax strategy.
Rule 2: If you are under the age of 59 ½, any unqualified withdrawals you make trigger a 10% penalty and income taxes.
While an IRA can be a reliable source of income during retirement, accessing these funds too early can result in costly penalties. Unqualified withdrawals taken before age 59 ½ are typically subject to a 10% penalty on top of regular income taxes. This is why early withdrawals should generally be avoided unless absolutely necessary.
Rule 3: There are early withdrawal exceptions.
Early withdrawal exceptions allow you to take money out of your IRA or retirement account before the standard age of 59½ without incurring the typical 10% early withdrawal penalty. These withdrawals are intended to help in situations of immediate and significant financial need, and the IRS defines specific circumstances under which these withdrawals are allowed. While you won’t face the penalty, you may still owe regular income taxes on the amount withdrawn.
Some exceptions include:
- Qualified higher education expenses
- Includes tuition, fees, books, supplies, and equipment required for enrollment or attendance at a postsecondary institution.
- First-time home purchase
- Up to $10,000 can be withdrawn to buy, build, or rebuild a first home.
- Unreimbursed medical expenses
- Medical expenses exceeding 7.5% of your adjusted gross income (AGI) qualify for a hardship withdrawal.
These are just a few of the available options. Learn more in our brief guide to early withdrawal exceptions or visit the IRS’ website.
Rule 4: The withdrawals you take in retirement are taxed as regular income.
Unlike Roth IRAs, which allow for tax-free withdrawals in retirement, the funds withdrawn from a traditional IRA are treated as regular income. This means that the amount you withdraw is added to your taxable income for the year, potentially impacting your tax bracket.
Rule 5: Individuals who are under the RMD age can make a qualified charitable distribution (QCD) directly from their IRA to a charity.
A Qualified Charitable Distribution (QCD) is a powerful tool for individuals who want to support causes they care about while potentially reducing their tax burden. A QCD allows you to transfer up to $100,000 annually from your IRA directly to a qualified charity, bypassing the need to withdraw the funds yourself. This direct transfer can count toward satisfying your required minimum distribution (RMD) requirements if you are of the appropriate age and it reduces your taxable income since the distribution isn’t treated as taxable income.
The benefits of a QCD go beyond tax savings. By excluding the distribution from your taxable income, you may also avoid moving into a higher tax bracket or triggering additional taxes on Social Security benefits. For retirees who don’t need to use their RMDs for living expenses, a QCD provides a meaningful way to make a difference while maintaining their financial strategy.
It's important to note that the charity receiving the QCD must be a qualified 501(c)(3) organization, and the funds must be transferred directly from your IRA to the charity. Keep detailed records and ensure your IRA custodian properly reports the distribution to avoid errors when filing taxes.
- Looking for charitable organizations in or around Cincinnati? Check out General Electric Credit Union’s (GECU) Giveback Partners.
Understanding the withdrawal rules for a traditional IRA is key to maximizing your retirement savings and minimizing costly penalties. From changes in RMD age to opportunities like QCDs, staying informed helps you make smarter decisions for your financial future. Whether you’re just starting your retirement savings journey or looking for ways to optimize it, turn to GECU to learn more. We offer both traditional and Roth IRAs and work with the best IRA specialists in the area.