Different Rules on IRA Withdrawals

Employed individuals may choose to open an Individual Retirement Account as a way to secure their funds for the future. People who are earning a taxable income are allowed to make contributions to an IRA. The Internal Revenue Services has set certain rules and regulations that govern the IRA, just like any other investment accounts. And as investors, we must be familiar with such IRA rules in order to be able to manage our accounts properly.

Two of the most popular IRA plans are the traditional IRA and the Roth IRA. Both of these plans have the same sets of contribution limits for the year 2011 (which is also the same with the limits for last year). The standard contribution limit is $5,000 at maximum. This is for those investors who are below the age of 50 years. The maximum contribution limit for those who are 50 or older by the end of the calendar year is $6,000.

Although these two IRA plans have the same contribution limits, they have different sets of IRA withdrawal rules. The contributions to the traditional IRA are tax-deductible, thus the distributions and withdrawals are regarded as a regular income which is subject to income tax. Account holders must be at least 59 and 1/2 years old in order to be eligible for tax-free withdrawals. Any withdrawal earlier than this will be charged an additional of 10% penalty. When the account holder reaches the age of 70 and 1/2 years old, he is forced to take mandatory distributions at a required minimum amount, which will be calculated based on the life expectancy of the account owner. The goal for this is to zero out the account (and pay all the taxes) by the time the account holder reaches his life expectancy age.

On the other hand, the contributions made to a Roth IRA are taxed right away. Therefore, all qualified distributions are totally free of taxes and fees. But certain parameters need to be met. The account holder must be at least 59 and 1/2 years old, and the account must have lapsed the 5-year holding period. Moreover, there is no mandatory distribution with a Roth IRA.