Urgency may strike anytime. Or maybe retirement is on the cards. In both cases, you may consider withdrawing money from your Individual Retirement Account (IRA), also called the Individual Retirement Arrangement. If Empower Retirement is responsible for your retirement planning, and you want to know how to withdraw funds from Empower Retirement, this guide will serve your purpose.
You need to know certain aspects when you plan to withdraw funds from IRA because the conditions differ when you withdraw before maturity and after maturity. Let us dive into the details and discover how to withdraw an amount from Empower Retirement.
Two kinds of IRA at Empower Retirement
The process of withdrawing funds differs as per the kind of IRA you hold at Empower Retirement. There are two options – Traditional IRA and Roth IRA. Let us understand these in brief before proceeding with the withdrawal procedure.
1.) Traditional IRA
A traditional IRA allows you to make investment contributions with money that you own before paying the taxes. It means your contributions are eligible for tax deductions. Certain factors like income threshold, tax-filing status, etc. influence the contributions to traditional IRAs.
The capital gains or dividend you earn on the investment are exempted from income taxes until you make a withdrawal. However, the withdrawal is subjected to income tax as per the tax slab at the time of retirement.
2.) Roth IRA
Roth IRA allows you to make investment contributions with money that you own after paying the taxes. It means your contributions are ineligible for tax deductions. But the withdrawals you claim at the time of retirement are completely tax-free, provided certain conditions are met. In Roth IRA, certain factors influence your contributions, such as modified adjusted gross income and filing status.
Types of Withdrawal Options
To withdraw money from Empower Retirement, you’ve got five options. Whether its traditional IRA or Roth IRA, these options are common for the accounts. Have a look at these.
a) Full distribution
You opt to withdraw the lump sum amount at once. The income tax and the withdrawal penalty (in case of early withdrawal) are applicable as per rules.
b) Partial distribution
You can opt to withdraw a partial amount as per your discretion. It is eligible for income tax and withdrawal penalty (in case of early withdrawal).
c) Periodic payment (amount certain)
You can opt to receive periodic payments wherein the amount you receive is fixed, irrespective of the time period.
d) Periodic payment (period of years)
You can opt to receive periodic payments wherein you receive fixed payments over a period of years as determined by you.
e) Periodic payment (substantially equal period payment over the owner’s lifetime)
You can opt to receive periodic payments distributed in a way that it lasts for a lifetime. The calculations are an approximate figure based on the owner’s life expectancy.
Note: If you are considering taking a loan from IRAs, you cannot do so. As per IRS Publication 590, you cannot take loans from IRAs.
Withdrawal from Traditional IRA
To make withdrawals (also called distributions) from traditional IRAs, there is only one main condition – you must have attained the age of 59.5 years. Once you attain the age, whether you withdraw a lump sum amount or partial distributions, it’s your decision.
Since traditional IRA contributions are tax-deductible, you owe the taxes to the government. Note that you have to pay all kinds of applicable taxes on the withdrawal(s) you make in a year. The withdrawal is subject to income tax, including federal, state, and local taxes.
If you plan to avail distributions before attaining 59.5 years of age, you can do so. However, a 10 percent early withdrawal penalty applies in addition to the income tax. But there are exceptions to this rule.
You can avail distributions before the age of 59.5 years without incurring the penalty in the following cases:
- You have unreimbursed medical expenses to pay that are more than 7.5 percent of your adjusted grossed income
- You use it for buying medical insurance (provided distribution is not more than the cost of medical insurance)
- You become disabled before 59.5 years of age
- You are receiving it in the form of an annuity
- You use distributions for higher education expenses (provided distribution is not more than the cost of expenses)
- You use distributions to buy, build, or rebuild the first home for yourself or a qualified family member (limited to $10,000 per lifetime)
- You use the distribution for expenses related to having or adopting a child
- You serve in the military and are on active duty for more than 179 days
- You claim the distribution as a result of an IRS levy
- The beneficiary claims the distribution after the death of the IRA owner
- The distribution is a qualified reservist distribution
Note: You must start taking required minimum distributions (RMDs) by April 1 of the year following the year you complete 70.5 years of age. Otherwise, you have to pay a 50 percent excise tax on the amount that was supposed to be withdrawn, as per RMD calculations. Also, you have to pay income taxes on the amount that should have been withdrawn.
Withdrawal from Roth IRA
You can avail distributions from Roth IRAs without paying any taxes. This is because you invested in a Roth IRA after paying your taxes. Therefore, the distribution is now tax-free.
Speaking of withdrawals, you can withdraw anytime the amount you contributed to the Roth IRA. You don’t have to pay taxes or penalties on the withdrawal of the contributions you made. This is called a qualified distribution. Your age or maturity period doesn’t have any influence over it.
However, if you wish to withdraw accumulated earnings on the contributions you made to the Roth IRA, you must wait for at least five years from the day you opened Roth IRA. Once five years are complete, you can avail the distribution if any of the following conditions are met:
- You attain the age of 59.5 years
- You are planning to buy, build, or rebuild the first home for yourself or a qualified family member (limited to $10,000 per lifetime)
- Roth IRA holder becomes disabled
- To a beneficiary or the estate after Roth IRA holder’s death
If the above conditions are not met, you may have to pay income tax or a 10 percent penalty or both. However, there may be exceptions, such as:
- To pay unreimbursed medical expenses amounting to more than 10 percent of the adjusted gross income
- To pay medical insurance if the account holder lost the job
- To pay for qualified higher education expenses
- To pay for childbirth or adoption (up to $5,000 if withdrawn within one year of the event)
Note: RMDs don’t apply to Roth IRA. You don’t need to take RMDs irrespective of your age.
You can gauge your current situation and accordingly contact Empower Retirement’s representative to withdraw money from your IRA. Since you are aware of the rules and conditions, you are in a better position to understand the intricacies. Therefore, you won’t face any problem while withdrawing money from your account.