How to distribute your IRA to a savings account

When it comes to saving for the future, few options are as popular or as proven as an individual retirement account (IRA). Because of their accessibility, flexibility and tax advantages, IRAs are important to many retirement savings plans. 

While IRAs are straightforward, the process of moving your hard-earned funds comes with several rules and conditions. You might ask questions like, “Can I distribute my IRA to a savings account?” or “What penalties come with an early distribution?” In this article, we’ll share important details about distributing IRA funds so you can make an informed financial decision. 

An IRA is a long-term savings plan offering individuals tax-deferred or tax-free growth, depending on the type of account. Anyone currently earning income can add to an IRA—even people with a 401(k) savings plan through their employer. The deposits within an IRA can be invested in a range of financial products, such as stocks, bonds and mutual funds. 

To reap these tax benefits, you can choose between two types of IRAs: traditional and Roth IRAs. A traditional IRA lets you contribute pretax money, which may lower your taxable income today. You’ll pay taxes when you distribute the money in retirement. A Roth IRA works the opposite way. You contribute after-tax money, so qualified distributions in retirement are tax-free.

Whether you have a traditional or a Roth IRA, there’s a maximum combined contribution limit across all your IRAs. The annual contribution limit typically changes each year. Be sure to check with the IRS to determine the current limit. 

Note: If your income is too high, you won’t be eligible to contribute to a Roth IRA. 

Because this money is meant for retirement, distributing from an IRA before age 59½ may come with taxes and penalties. For example, if you distribute money from a traditional IRA before age 59½ , not only will you generally owe income tax on the amount, but you will also have to pay a 10% early distribution penalty unless the IRS allows an exception. 

The rules for distributions from a Roth IRA are different. You can distribute all contributions to a Roth IRA without taxes or penalties. Tax rules dictate to what extent a distribution is of prior contributions or earnings. You may owe taxes and penalties on your earnings if you distribute them before age 59½ or before your Roth IRA has been open for at least five years. Some exceptions may apply. Make sure you understand the rules before making any early distribution from an IRA and discuss with a professional as needed.

If you transfer money from one traditional IRA to another traditional IRA, or from one Roth IRA to another Roth IRA, you won’t trigger income taxes or penalties. This money movement can also be accomplished through a rollover. An indirect rollover is where you get a distribution payment from your traditional or Roth IRA and then you send it to another financial institution into another same-type IRA. This must also be done within 60-days of getting the payment. If you transfer directly to another financial institution, you never touch the money. To move your IRA, contact the financial institution where you hold your account and tell them where you want to distribute your funds.

Keep in mind that recharacterizing or converting funds from a traditional IRA into a Roth IRA may trigger an immediate tax bill but no early distribution penalty. 

What if you need early access to your IRA savings? Moving funds from an IRA to a savings account counts as an early distribution if you are younger than 59½ . In that case, the money would be subject to the taxes and penalties mentioned above.

A few exceptions may reduce or eliminate penalties when distributing your IRA to a savings account. For example, you may qualify if you:

• Have a permanent disability
• Must pay unreimbursed medical expenses above the IRS threshold
• Use the money for qualified higher education expenses
• Qualify as a first-time homebuyer

If you meet one of these exceptions, you may be able to avoid the penalties that typically apply to early distributions.

However, these exceptions—and others—come with several qualifying factors and distribution rules. It’s recommended that you meet with a financial expert before making this kind of distribution of IRA funds. 

There can be several long-term impacts of taking money out of your IRA early. Try to stick with your retirement plan and avoid dipping into your IRA funds unless necessary. Early distributions often come with a penalty, and the additional taxes you pay can reduce the value of your savings. In some cases, those costs may even outweigh the interest or investment growth you’ve earned over time.

An IRA is a valuable part of your retirement planning thanks to the tax advantages it offers. Leaving those funds alone to grow over time (in addition to making other financial contributions) can help put you on a path to having enough money during your retirement. 

Understanding how IRA distributions work can help you make the right decisions about your retirement savings and avoid unexpected taxes or penalties. Before moving money out of an IRA, consider your long-term goals and how the distribution fits into your overall financial plan. A careful approach can help protect your savings and keep your retirement strategy on track.

To recap, here’s what you need to know about distributions made from an IRA to a savings account:

• Moving funds from one IRA to another like IRA is not the same as an IRA distribution. Knowing the difference can help you avoid unnecessary taxes and penalties. 

• Moving funds between eligible retirement accounts may allow you to keep your money invested without triggering taxes. On the other hand, taking money out of an IRA may have unwanted and unplanned for financial impacts. 

• Before making a move, review your options and understand how the decision could affect your long-term savings strategy.

Whether you’re planning for retirement or building your savings along the way, choose an account that matches your needs. Consider opening a Capital One 360 Performance Savings account that offers a strong rate from day one and helps you earn more over time.