Can I take money out of my Individual Retirement Account (IRA) while working?

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March 2017
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Yes, you can take distribution from your IRA. The fact you are working does not affect your eligibility, but there may be certain tax/penalties to be paid, as described below.

1. If the account is a Traditional IRA, you have to pay income tax on the amount taken out (as the taxation was deferred to the distribution time, so you never paid taxes on it), and if you are under 59 1/2 also, a 10% penalty, subject to below exceptions.

2. If the account is a Roth IRA, a) the distribution is made after 5 year from the first contribution, AND b) the owner is 59 1/2, entire distribution is tax-free and penalty free.

    If, however, one of the above is not met, then the distributions will be segregated by their nature

    - contributions (always tax-free and penalty free)

    - conversions (tax-free but subject to 10% penalty if less than 5 years)

    - earnings (will be taxed and 10% penalty will apply)

    Distributions have to be taken in the following order: First contributions, then conversions, and last earnings.

Example; If the account has $7,000 in total: $5,500 from contributions, $1,000 from conversions, and $500 from earnings. If $6,000 is distributed, the first $5,500 will be tax-free and penalty free while $500 (from conversions) gets a 10% penalty, or $50. If, however, the entire $7,000 is needed, the $1,000 will get a penalty of $100, and the earnings will be taxed as ordinary income, and a penalty of $50.

3. Simple-IRA- If a distribution is taken within the first 2 years of establishing the plan, the penalty increases from 10% to 25%. After the 2 years, it becomes 10%, like for the above two IRAs. 

Exceptions to the 10% penalty apply to all the IRA accounts above:

- made to the beneficiary of the account's estate at the death of the beneficiary

- if account owner is disabled

- if substantial equal periodic payments are initiated (Section 72(t)) based on your life expectancy, which can not be reversed once initiated

- for medical expenses in excess of 7.5% of your AGI (adjusted gross income)

- for higher education expenses

- for first-time home purchase (up to $10,000)

- payment of health insurance premiums by unemployed

- IRS levy

- a qualified reservist distribution

As a planning strategy, it is best to take money from the contributions to a Roth first, instead of withdrawing from the Traditional or Simple IRA, if you have the option.

Alternative sources, if you have, would be best, like a brokerage account, a loan within a 401(k) (up to 50% of the amount, max $50K usually, or according to the plan document).

Good luck.

Alina Parizianu, MBA, CFP®

July 2014
March 2017
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March 2017