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How much can I take out of my IRA without penalty?

Q: I will turn 81 this year. Can I take as much money as I want out of my IRA without penalty?

A: Here are a few important points someone in your situation should understand about distributions from an IRA:

IRA taxes vs. penalty

As someone who is past age 59 1/2, you can take as much out of an IRA as you want without penalty. However, there is a distinction between a penalty and ordinary income tax consequences.

A 10 percent penalty applies to withdrawals from an IRA by someone who is under age 59 1/2. That does not apply to you, but your withdrawals may be subject to ordinary income taxes for the year in which they are made. These tax consequences depend on whether you have a traditional IRA or Roth IRA.

Traditional vs. Roth IRAs

The distinction between a Roth and a traditional IRA boils down to paying the Internal Revenue Service up front or paying them in retirement.

If you have a Roth IRA, your contributions were not deductible, so you paid the tax on that money when it was earned. The good news is that eligible distributions from your Roth IRA are not subject to income tax.

If you have a traditional IRA, you benefited from a tax deduction at the time you made contributions to the IRA. Since this money has not yet been taxed, you must include it in taxable income for the year when it is taken out of the IRA.

Required minimum IRA distributions

Aside from the question of whether you can take money out of your IRA, there are times when you are required to do so. This applies only to traditional IRAs, not to Roth IRAs.

Upon reaching age 70 1/2, you are required to start taking some money out of a traditional IRA each year and pay tax on those distributions. These are known as required minimum distributions (RMDs) and the amounts are determined according to a formula based on how long you are expected to live.

Since you are over age 70 1/2, if you have a traditional IRA and have not yet been taking RMDs, it may be wise to contact the IRS to discuss how to rectify the situation.

Don't take money out on IRA before it's needed

There's one final point to be made about taking money out of an IRA. Although you have reached an age where you can take as much money out as you want, it is wise not to take out any more than you need.

After all, as long as money remains within an IRA, its investment growth avoids, or at least delays, taxation. Plus, with a traditional IRA you should be careful of your withdrawal pace. Since these withdrawals are considered taxable income, taking money out too quickly can bump you into a higher tax bracket.

Unless you have to make RMDs or need the money for expenses, it is a good idea to keep your money in an IRA for as long as possible.

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