• For much of the 20th century individual taxpayers relied on a combination of company pension plans, personal savings and Social Security for their retirement. Many individuals who were self-employed, or who worked for companies that did not provide a pension plan, had little access to tax-advantaged retirement programs. Congress recognized this gap and in 1974 passed the Employee Retirement Income Security Act, which provided these taxpayers with access to an individual retirement account (IRA). Subsequent legislation extended this type of account to all taxpayers.
  
  

Early Withdrawals

• An IRA account holder can withdraw funds from a traditional IRA at any time during the 2010 tax year. Assets withdrawn prior to the account holder turning 59 1/2 years of age are considered to be early withdrawals. Early withdrawals will be taxed as ordinary income, and the account holder will be assessed an additional 10 percent tax penalty on the amount withdrawn.
  
  In some cases, an account holder who is under 59 1/2 years may take funds from her IRA without incurring a tax penalty. Distributions taken to pay medical expenses that exceed 7.5 percent of the account holder's adjusted gross income, distributions made to purchase or build a first home and distributions made by account holders who have become completely disabled prior to reaching 59 1/2 years are examples of IRA withdrawals that do not involve an early withdrawal tax penalty.
  
  

Qualified Withdrawals

• Assets withdrawn after the account holder reaches 59 1/2 years are considered to be qualified withdrawals and are treated as ordinary income. Amounts withdrawn must be reported on the account holder's income tax return. These funds will be taxed at the account holder's current tax rate. The account holder is not required to begin making withdrawals from her IRA at this time, and may continue to fund her account in accordance with current limits as defined by the Internal Revenue Service.
  
  

Mandatory Withdrawals

• IRA account holders are required to begin taking distributions from their accounts once they reach 70 1/2 years of age. The amount required to be withdrawn is referred to as the required minimum distribution (RMD). Funds that meet the RMD are treated as ordinary income. These funds must be reported on the account holder's income tax return and are taxed at the account holder's current tax rate. If the account holder does not withdraw the full RMD, any amount less than the RMD will incur a 50 percent tax penalty.