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?
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.
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.
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.
- 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.
5 Biggest Financial Mistakes ER Doctors Make & Simple Ways to Solve Them.
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