How to Take Money Out of an IRA

Taking money out of an IRA may be easy, but it's not always smart.

Get answers to your questions
••• Know how to avoid penalties and taxes when you take money from your IRA. David Samuel Robbins/Getty Images

Taking money out of an IRA is as easy as calling the financial institution where your IRA account is at and telling them you would like to take money out but there may be tax consequences. Once you weigh the pros and cons, if you decide to move forward, you simply sign the appropriate paperwork. Here's a guide to what to expect when you take money out of an IRA.

Investment Decisions

Depending on how your IRA funds are invested you may need to direct your financial institution as to which assets in your IRA to sell. For example, if you own mutual funds or stocks and bonds in your IRA and are cashing in the entire IRA, then you would sell everything in the IRA. If you only need some of the money in your IRA, you will need to decide which mutual funds, stocks or bonds to sell.

If you're not planning to spend the money but instead want to move your IRA to another brokerage, you can transfer money from an IRA at one institution to an IRA at another institution. With a transfer, the funds are never really taken out of an IRA – instead, you are moving the IRA money from one IRA account to another. IRA transfers are not subject to income taxes or penalty taxes provided you follow IRS rules for governing the transfer.

When Can You Take Money Out of an IRA?

You can actually take money out of an IRA anytime. But if you take money out of your IRA before you reach age 59 ½ and you don't meet certain , you may pay a 10% penalty tax on the amount withdrawn. Traditional IRA distributions are also included as taxable income when you file your tax return.

Bottom line: it’s not a matter of when you can take money out of an IRA; it’s a matter of how much in taxes and penalties you’ll pay if you take money out of your IRA at the wrong time.

How Much in Taxes Will I Pay on IRA Withdrawals?

Any time you take money out of a traditional IRA, it becomes taxable income in the year it is withdrawn. The amount of taxes you will pay depends on your marginal tax rate that year – which depends on the total amount of other income and deductions you have.

If you have no other income the year you take an IRA withdrawal and you have sufficient deductions, it is possible you won’t pay any taxes at all. 

Mistakes to Avoid

You may find yourself in debt and feel that taking money out of an IRA is your only option. Think twice before you use this option. IRA money is . What if your financial situation gets worse? By taking money out of your IRA you will be voiding the valuable creditor protection described below.

  • Up to $1 million of IRA money is protected from bankruptcy claims under federal law if you contributed directly to the account (meaning this protection may not be extended to an IRA account that you inherited).
  • The entire IRA account balance is protected if the money was rolled over to an IRA from a company plan (such as a 401(k) or 403(b) plan).
  • IRA assets may be sheltered from creditor claims other than bankruptcy. This is determined by state law and laws vary widely from state to state.

Disclaimer: it is always best to check with an attorney in your state on which assets creditors can go after. Rules vary by state.

The Best Time to Take Money Out of an IRA

An IRA is an Individual Retirement Account. You put the money in there so you can use it in retirement. The best time to take money out of an IRA is according to a smart withdrawal plan. A withdrawal plan means you have looked at your expected income each year in retirement and the starting date of Social Security, pensions and any other sources of income, and then estimated your tax situation in retirement and used that to decide which years you should take more or less IRA withdrawals.

When do I Have to Take Money Out of an IRA?

For a traditional IRA (not a Roth IRA) you must begin withdrawals soon after reaching the age of 70 ½. These withdrawals are called required minimum distributions. The amount you must withdraw is determined by a formula that is recalculated each year based on your age and prior year end account balance.

What about taking money out of a Roth IRA?

The rules discussed above apply to traditional IRAs where you made deductible contributions. Roth IRAs have a different set of tax rules that apply.