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Individual Retirement Accounts (IRA's) Rules On Contributions And Withdraws.

Article By : Patrick Mansfield | U.S. Consumer Finance

There are two types of IRAs: Traditional and Roth. 

A traditional IRA - allows you to make contributions with pre-tax dollars and receive a current tax deduction for your contribution so long as your income falls within certain limits. However, withdrawals are taxed at your ordinary income tax rate when you retire.

A Roth IRA - allows you to make contributions with post-tax dollars. While there is no current tax benefit for contributing to a Roth account, your withdrawals will not be taxed when you retire. This makes a Roth better for those who believe their tax bracket will be at high levels upon retirement.

Rules Governing IRAs

There are a couple of rules in place for Individual Retirement Accounts that you need to know:

Early withdrawals face penalties- A person who has opened an IRA should avoid withdrawing funds from that IRA before age 59 1/2. If they do so, the withdrawal amount will face a 10% tax penalty in addition to facing ordinary income tax rates. 

There are a few exceptions to this rule that are in place, but you will want to check with a tax advisor before acting. Also, Roth contributions can be withdrawn tax-free at any time, but earnings above the contributions cannot be withdrawn without penalty.

Beneficiaries have a say - if the owner of an IRA passes away,
his or her beneficiary has some leeway in deciding how to treat the account. They can designate themselves as the owner of the account, roll it over into another account, or simply receive the proceeds of the account as a beneficiary.

Rollovers need to take place within 60 days - If an individual chooses to roll over accounts from one custodian to another, the transfer needs to take place within 60 days or the funds of the account become taxed at ordinary income tax rates plus the 10% penalty rate discussed earlier. 

In most cases, custodians complete the transfer process on behalf of the account holder at this time. However, if the old custodian writes you a check, the check needs to be deposited at the new firm within 60 days.

Contribution Information

For 2017, all IRAs have a combined contribution limit of $5,500 for individuals under age 50. Even if an individual has both a Roth and a Traditional account (which is allowed), the combined contribution to both accounts cannot exceed $5,500. However, the IRS allows individuals over 50 to catch up by contributing up to $6,500 in a year.

For traditional IRAs, contributions are deductible up to certain limits based on your income and whether or not you have a retirement account through your employer. Current deduction standards can be found on the IRS website for each new tax year.

An individual is not allowed to make contributions to a traditional IRA past age 70 1/2, but an individual with a Roth account may continue to contribute.


An IRA owner is allowed to begin making penalty-free withdrawals at age 59 1/2. However, many individuals will choose to keep letting their money grow until they are fully ready to retire. 

For individuals holding traditional IRA accounts, it is required by law that you begin taking required minimum distribution (RMD) checks from your IRA when you turn 70 1/2. Roth accounts do not require RMDs, and an account owner can simply let the account grow until his/her death for beneficiaries. 
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