What Is An Ira Distribution And How Does It Work

Individual Retirement Accounts or IRA are tax-deferred plans which allow individuals to save and make money for retirement. Essentially there are four types of IRA accounts – Traditional IRA, Roth IRA, Simplified Employee Pension ( SEP) and Savings Incentive Match Plan for Employees ( SIMPLE).

The advantages of investing in retirement plans is obvious for individuals but there are certain rules which need to be taken into consideration whenever you decide to withdraw money from an IRA account, commonly referred to as IRS distribution.

Instructions

  • 1

    Guidelines

    With IRA’s being an important saving avenue for most individuals, it is important that you are aware some of the general guidelines. There is a maximum amount which one can contribute to the IRA account.

    As of 2010, this was $5000 but can rise up to $6000, if you have crossed 50. One can open up an account when he or she is at least 21 and older. Only you can withdraw the money however, you can assign a custodian such as a broker if you have a self-directed IRA.

    These funds can only be distributed after you have reached 59 1/2. However, exceptions exist if you have suffered any disability or serious medical condition.

  • 2

    Traditional and Roth IRA

    These two types of IRA accounts are opened by individuals on their own. The main difference between the two accounts is the tax exemption status.

    Traditional IRAs will have tax deductible contributions, which imply that money will only be taxed when it is withdrawn or distributed. Early distribution is subject to 10 percent tax however, exceptions exist. It is important that you take out the money before the age of 70.5. If the mandatory distribution is not exercised you may be fined as much as 50 percent of your savings.

    In Roth IRA, your contributions are not tax deductible because the money has already been taxed. Due to this, contributions can be withdrawn at any time however; a penalty may be charged if the earnings were distributed before age 59.5 and the funds were not in the account for the past five years.

  • 3

    SEP and Simple

    These two types of IRA accounts follow the same guidelines but are opened by the employers of an organization. For SEP, the contributions can mount up to 25 percent of your earnings. As for Simple, it works as a 401k plan and allows the employer to make lower contributions.

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