• All IRA withdrawals must be reported on your taxes.tax forms image by Chad McDermott from Fotolia.com
  
  The U.S. Congress first authorized traditional individual retirement accounts (IRAs) in 1974 under the Employee Retirement Income Security Act. It introduced Roth IRAs more than 20 years later under the Taxpayer Relief Act of 1997. Because of the significant tax benefits these accounts provide, the Internal Revenue Service (IRS) sets rules for when money can be taken out of IRAs and how those distributions will be taxed.
  
  

Qualified Distributions

• The IRS distinguishes between "qualified distributions" and "non-qualified distributions" when determining the tax treatment of withdrawals from an IRA. Tax-deferred IRAs require only that you be at least 59 1/2 years old at the time of the withdrawal for the distribution to be qualified. Roth IRAs have a more complicated, two-part rule. First, the Roth IRA must be open for five tax years, counted from Jan. 1 of the tax year the account was opened. Second, the account holder must be 59 1/2, afflicted with a permanent disability or using no more than $10,000 for the expenses of buying a first home.
  
  

Tax Treatment

• You must include all traditional IRA distributions, both qualified and non-qualified, in your taxable income for the year. However, if you take a non-qualified distribution, you must also pay a 10 percent tax penalty on top of the income taxes. Qualified Roth IRA distributions come out tax-free. The tax treatment of non-qualified Roth distributions depends on whether you withdraw contributions, which come out first, or earnings. Contributions come out tax-free and penalty-free because they are made with after-tax dollars. Early earnings withdrawals incur income taxes and a 10 percent tax penalty.
  
  

Exceptions

• The IRS makes a few exceptions for early withdrawals to avoid the 10 percent early withdrawal penalty. If you have medical expenses that exceed 7.5 percent of your adjusted gross income, you can withdraw money to pay for those costs. You can also withdraw money if you suffer a permanent disability. In addition, the IRS waives the early-withdrawal penalty on money used to pay for higher education costs or up to $10,000 for first-time home buyer expenses.