Holders of traditional IRA accounts have to pay regular income taxes on distributions after age 59 1/2, reports CNN Money. Holders of Roth IRA accounts do not pay taxes on distributions.Continue Reading
Money withdrawn from a traditional IRA is taxable income because it was deposited into the account tax-free, says CNN Money. On the other hand, holders of Roth accounts pay taxes when they deposit funds, so they withdraw funds tax-free. In both types of accounts, the income that accumulates from interest, capital gains and dividends is tax-free. There is no penalty if a traditional IRA account holder does not begin distributions at age 59 1/2, but regular distributions must begin by the age of 70 1/2 even if the account holder has not retired, according to the IRS. Roth accounts have no time limit on initiating distributions.
Those who begin distributions from traditional IRA accounts before age 59 1/2 must pay penalty fees of 10 to 25 percent in addition to regular income tax, states the IRS. Exceptions to this rule include distributions for medical expenses that total more than 7.5 percent of the account holder's adjusted gross income, buying a first home, educational expenses for the account holder or immediate family, medical insurance while unemployed or the disability of the account holder, reports About.com. Account holders can also begin early penalty-free withdrawals if they set up substantially equal periodic payments for at least five years.Learn more about Financial Planning