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Mark for follow up Question 36 of 50. Victoria made deductible contributions to traditional trement accounts for several year
U Mark for follow up Question 41 of 50. Evelyn, age 53, takes an early distribution from her traditional IRA. The 10% penalty
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You can start taking distributions from your IRA without paying a tax penalty when you reach age 59 1/2, but the amount you withdraw may be subject to income taxes depending on the type of IRA. Your annual distributions are included in the calculation of your total taxable income for that year. The government offers you a tax benefit when you invest using an IRA. As a result, the government expects you to use this tax-advantaged money for its intended purpose — retirement — and sets rules accordingly. When you break the IRA withdrawal rules, you are subject to a penalty. This penalty can be hefty, depending on the circumstances.

If you take money out of your traditional IRA before you reach age 59½, you are subject to a 10% penalty.

Once you reach age 70½, you must take withdrawals from your traditional IRA. Up until this age, you aren’t required to take money out of your IRA if you don’t want to.

You need to be aware of the five-year rule with your Roth IRA. This regulation states that initial contributions to your Roth IRA must be made at least five years before you start withdrawing earnings. Say you’re 57 when you start contributing to a Roth IRA. In that case, you can’t actually start withdrawing your earnings at age 59½ without triggering a penalty — since the five years hasn’t been met. You need to wait until you are at least 62 to satisfy the rule.

Roth IRA Rules: Contributions to Roth IRAs are made with after-tax dollars. That means you pay income tax on your contributions the year you make them. As a result, withdrawals of Roth contributions are not subject to income tax, as this would be double taxation.

Roth IRA Earnings & Withdrawal Rules

Your earnings are tax-free if both of these are true:

  • You’ve had the Roth IRA for at least five years.
  • You’re age 59 1/2 or older when you withdraw the money.

The Roth IRA earnings you withdraw are tax-free at any age if both of these rules apply:

  • You’ve had the Roth IRA for at least five years.
  • You qualify for one of these exceptions:
    • You used the money for a first-time home purchase — up to the $10,000 lifetime limit.
    • You are totally and permanently disabled.
    • Your heirs received the money distributed after your death.

If you die before meeting the five-year test, the IRS will tax your beneficiaries on distributed earnings until this test is met.No matter your age, your earnings are taxable if you don’t meet the five-year test. This is true even if your earnings are penalty-free.Each traditional IRA you convert to a Roth IRA has its own five-year holding period to avoid an early withdrawal penalty. The IRS requires your IRA custodian or trustee to send you Form 5498. This shows your:

  • Annual IRA contributions
  • All IRA conversions

Evelyn aged 53 takes early distribution from her Traditional IRA.The 10% penalty tax will not appy to the extent that qualified educational expenses were paid to an eligible educational institution for Evlyn or her Spouse or dependent child.

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