Traditional IRA Rules
There are two kinds of contributions that can be made to a traditional IRA, depending on your circumstances: deductible and non-deductible.
If your IRA includes deductible contributions, these will be taxed when you withdraw them. Likewise, the interest you earn in your IRA will be taxed on withdrawal.
If you make these withdrawals before you are 59½, you will also owe a 10% early withdrawal penalty, unless you meet an exception.
The exceptions to the 10% early withdrawal penalty are:
- You need the money to pay for significant, unreimbursed qualifying medical expenses (for details see IRS Publication 590)
- You need the money to pay for medical insurance premiums after losing your job
- You become disabled
- You die, and your beneficiary takes a distribution
- You take the payments as an annuity, that is, a series of substantially equal payments over your lifetime or your life expectancy
- You use the money to pay for qualified higher education expenses
- You use the money to pay certain qualified first-time homebuyer amounts
- You roll the money over into another IRA within 60 days
If your traditional IRA includes nondeductible contributions, you will not have to pay tax or a penalty on that portion when you withdraw it, even if you are younger than 59½.
There are strict ordering rules for withdrawing money from traditional IRAs. Withdrawals are made up of a combination of contributions and earnings, so you can't decide to withdraw only some of your nondeductible contributions, to avoid tax.