Withdrawals from qualified plans taken before age 59½ are taxed by the IRS at 10% (e.g., a $1,200 tax penalty on a $12,000 withdrawal). At age 59½, taxpayers can begin penalty-free withdrawals from IRAs or tax-deferred employer plans such as a 401(k) or 403(b). They must begin making withdrawals, called required minimum distributions or RMDs, starting at age 70½. A stiff tax penalty will be charged if withdrawals don't begin at this age. The penalty is 50% of the amount that should have been taken out but was not.
To summarize, taxpayers have total discretion over what to do with their retirement savings during the years between age 59½ and age 70½. All withdrawals that are taken, regardless of the taxpayer's age, are taxable at the taxpayer's ordinary income tax rate.
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