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-without paying a tax penalty-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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