At What Age Is IRA Withdrawal Tax-Free?

I opened an Individual Retirement Account (IRA) in my 20s to start saving for retirement. If you haven’t started investing for your long-term goals, today is the day to start.

An IRA offers tax advantages now and when you retire, enhancing your financial security. Knowing when and how to withdraw funds helps maximize the accounts’ benefits.

Types of IRAs

The following are popular types of IRAs:

1.  Traditional IRA: A Traditional IRA is a retirement savings account that allows pre-tax contributions to reduce taxable income for the calendar year in which the contributions are made. The money grows tax-deferred, and withdrawals are subject to regular income tax.

2. Roth IRA: A Roth IRA is a retirement savings account that allows after-tax contributions toward retirement savings. The contributions and earnings grow tax-free, and withdrawals after age 59 ½ are tax-free after the account is held for at least 5 years. 

3. Inherited IRA: An inherited IRA is opened when a beneficiary inherits an IRA or employer-sponsored retirement plan, such as a 401(k), after the original IRA owner’s death. Although no additional contributions can be made, the funds remain tax-free and protected from an early withdrawal penalty. Required minimum distributions must begin when the beneficiary turns 73.

IRA Withdrawals

Withdrawals of contributions to and earnings from a Traditional IRA after age 59 ½ are taxed as ordinary income and penalty-free. In contrast, withdrawals before age 59 ½ are subject to regular income tax plus a 10% federal penalty tax.

Withdrawals of contributions to a Roth IRA after age 59 ½ are tax-free and penalty-free. Conversely, withdrawals before age 59 ½ can be subject to penalties and taxes on the earnings portion.  

Withdrawals from an inherited IRA are subject to the following rules:

• A spousal beneficiary and certain non-spouse beneficiaries might be allowed to take required minimum distributions over their life expectancy.

• A non-spouse beneficiary who inherits an IRA from someone who passed away in 2020 or later might be required to withdraw the account balance within 10 years.

• A beneficiary pays taxes on withdrawals from an inherited Traditional IRA.

• A beneficiary does not pay taxes on withdrawals from an inherited Roth IRA if the original owner held the account for at least 5 years.

Exceptions to IRA Withdrawal Rules

Withdrawals of contributions to a Traditional or Roth IRA before age 59% might not be subject to the 10% federal penalty tax if any of the following occur:

• The IRA owner is completely and permanently disabled.

• The owner uses the withdrawal, up to $10,000, for a first-time home purchase.

• The withdrawal is made to a reservist ordered or called to active duty after September 11, 2001, for more than 179 days.

• The owner withdraws up to $5,000 per child within 1 year of the birth or adoption of a child.

• The withdrawal covers postsecondary education expenses.

• The IRS has a levy on the IRA.

• The withdrawal pays for certain unreimbursed medical expenses.

• The owner must cover health insurance premiums after receiving at least 12 consecutive weeks of unemployment compensation.

• The IRA owner makes substantially equal periodic payments taken under IRS guidelines.

• The withdrawal goes to a beneficiary or the IRA owner’s estate after the owner’s death.

Consulting IRS Publication 590-B and talking with a tax professional can provide additional guidance.

IRA Withdrawal Requirements

The owner of a Traditional IRA must take their first required minimum distribution (RMD) by April 1 of the year following the year they turn 73:

• For each subsequent year, the owner must take the RMD by December 31.

• The IRS determines the RMD based on the owner’s life expectancy and the prior year-end account balance.

• Failure to take an RMD can result in a 25% penalty on the amount that should have been withdrawn.

The owner of a Roth IRA is not required to withdraw money at any time. They can keep the funds invested for as long as desired.

The beneficiary of an inherited IRA must begin making RMDs when they turn 73. The IRS determines the amount based on the account value and the person’s life expectancy. Failure to take an RMD can result in a 25% penalty on the amount that should have been withdrawn.

*This information is for educational purposes only.