Premature Withdrawals and Insufficient Distributions from IRAs

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Premature Withdrawals and Insufficient Distributions from IRAs

Premature withdrawals are those that occur before the individual reaches age 59½. The IRS levies a penalty tax of 10 percent of the amount withdrawn if funds are withdrawn prematurely.

No penalty tax is charged in the following situations

• Attainment of age 59½
• Periodic payments made in the form of a life annuity
• Unreimbursed medical expenses that exceed a certain limit
• Buying a home for the first time if the home is to be a principal residence. The limit is $10,000 over the homebuyer’s life.
• Qualifying health insurance premiums if the individual is unemployed
• Qualifying educational expenses
• Disability or death
• The distribution is due to an IRS levy of the qualified plan
• The distribution is a qualified reservist distribution
• Expenses of up to $5,000 after the birth or adoption of a child
• Qualified disaster distribution
• Terminal illness

New in 2024

Starting in 2024, you can make a penalty-free withdrawal up to $1,000 per year from an IRA for emergency purposes. Withdrawals will still be taxable and may be repaid within 3 years (though repayment is not required). You are allowed only one withdrawal during this 3-year period unless you have paid it back.

At 73, you must take distributions from your IRA

You are required to take distributions from your accounts at least once per year once you reach age 73. Prior to changes in the law in late 2022, the age was 72. To do this, you must withdraw certain minimums figured by the IRS. If you fail to, you will be penalized for insufficient distributions. Beginning with changes in the law in 2023, this penalty is now 25% of the amount you did not withdraw. For example, if you are required to withdraw $300 during a certain time and withdraw only $200, you will be required to pay one-quarter of the $100 difference, or a penalty of $25. If you correct your failure to withdraw the minimum amount in a timely manner, the penalty will drop to only 10%.

How to calculate your required minimum distribution

The IRS provides life expectancy tables one can use to calculate the required minimum distribution after age 73. You may use one of the following methods as long as it meets the minimum distribution requirement:

• Division of the account balance by your life expectancy from the appropriate table each year.
• Conversion to a life annuity (or life and joint survivor)

You can always take more but not less than the required minimum distribution. However, you get the greatest tax savings by only taking the required minimum distribution.