When can you withdraw from your IRA? This is really a three-part question:
- When can you withdraw?
- What tax will you owe?
- What penalty will you owe?
See also our companion post: When can you withdraw from your 401(k)?
When can you withdraw from your IRA?
You can withdraw from your IRA anytime. Simple as that.
What tax will you owe?
Pre-tax IRA
Withdrawals from a pre-tax IRA are taxed as ordinary income.
Put simply, a pre-tax IRA is any IRA that’s not a Roth IRA. More specifically, a pre-tax IRA means:
- A Traditional IRA to which you made annual contributions.
- A Rollover IRA into which you rolled over money from a previous 401(k) or similar retirement plan.
- A SEP or SIMPLE IRA.
How much tax you’ll owe depends on your individual situation:
- A full-time practicing ER doc will pay at least 24% federal income tax, if not 32% or more (2022), plus state income tax if any.
- A retired ER doc could pay as little as 12% federal income tax (2022) with careful planning.
Roth IRA
Withdrawals from a Roth IRA are tax-free in two cases: withdrawal of contributions, and qualified distributions.
Withdrawal of contributions
You can always withdraw Roth IRA contributions tax-free and penalty-free, no matter what. And, contributions are treated as coming out first.
Example: Say you’ve contributed $50K to your Roth IRA and it’s now worth $100K.
In this case, your first $50K of withdrawals is tax-free and penalty-free. After that, you’ll have $0 of contributions and $50K of earnings left.
Qualified distributions
A distribution from a Roth IRA is qualified, and therefore tax-free, if you meet both of the following conditions:
- You’ve had a Roth IRA for at least five years. It doesn’t have to be this Roth IRA; it can be any Roth IRA.
- The distribution is:
- Made on or after the date you reach age 59.5; or
- Made due to disability; or
- Made due to death; or
- Made for a first-time home purchase (up to $10K lifetime limit).
In the example above, your Roth IRA now has $0 of contributions and $50K of earnings in it. To withdraw the $50K earnings tax-free, the distribution must be qualified. The most common case is that you’ve had a Roth IRA for at least five years, and you’re over age 59.5.
What penalty will you owe?
Before age 59.5
Withdrawals from pre-tax IRAs, and withdrawals of Roth IRA earnings, before age 59.5 are subject to a 10% early withdrawal penalty. Your state may tack on a penalty too.
There are several exceptions to the 10% penalty. A full list is here. The most relevant ones for ER docs are below.
- Disability.
- Death.
- First-time home purchase (up to $10K lifetime limit).
After age 59.5
There is no 10% penalty on IRA withdrawals after age 59.5.
Withdrawals of Roth IRA earnings over age 59.5 are subject to tax, but not penalty, if you haven’t had a Roth IRA for five years.
We help ER docs get the income they need in retirement, as tax-efficiently as possible. To learn more, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.
