- Traditional IRA distributions are straightforward. If you meet the age requirement, it is a normal distribution. If you don't meet the age requirement, it is an early distribution. Normal distributions are added to income for tax purposes. Early distributions are also added to income but have an additional 10 percent tacked on as a penalty. By 65, you more than satisfy the age threshold required for normal distributions. All your money is available, penalty-free, but be sure you can handle the tax bill associated with it.
- Roth IRA distributions are not as clear cut as traditional IRA distributions. The age threshold still exists and is the same at age 59 1/2. However, regardless of age, the IRA must be funded for at least five years to get normal distributions. If you are 65 but funded the IRA three years ago with a conversion, you still don't meet the normal distribution requirements. Early distributions in a Roth add the earnings to income and penalize them 10 percent.
- Just because the Roth distribution is an early one, you might still get away without a tax issue. The reason is the IRS Ordering Rules for Roth distributions. These rules say that you distribute contributions and converted funds before earnings. Only earnings are taxable and penalized. This means a $100,000 IRA converted three years ago now worth $120,000 gives you $100,000 of tax free access.
- At age 65, you don't need to worry about penalty waivers in a traditional IRA; you won't be penalized for distributions. However, if you are subject to the 10 percent penalty with Roth distributions, certain withdrawals qualify for a penalty waiver by the IRS. The earnings are still taxable, just not hit with an extra 10 percent. Waivers are given when buying a first home, using funds for college education or under certain hardship distribution requirements such as paying medical expenses exceeding 7.5 percent of income. Talk to your tax adviser about possible waivers that apply.
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