Do IRA dividend payouts count as withdrawal?

[MidwestnRich]

Very very young moustachian here. (Peach fuzz sort of 'stache at this point.)

My question is: If I have an IRA at early retirement (either Roth or Traditional) and my holdings earn dividends. If I were to choose to keep those dividends rather than re-invest in the IRA (is that even possible?), does that count as a withdrawal?  And is it subject to a penalty if I'm under 59.5?

I hope the question makes sense. Basically, if I'm dumping money into an IRA now (I'm 23) will I be able to live off those dividends in 10 years? Without penalty?

[MDM]

My question is: If I have an IRA at early retirement (either Roth or Traditional) and my holdings earn dividends. If I were to choose to keep those dividends rather than re-invest in the IRA (is that even possible?), does that count as a withdrawal?

If you take money out and don't roll that money over to another IRA (or similar), it's a withdrawal.  Doesn't matter whether it is dividends, capital gains, or some part of your original contribution.

And is it subject to a penalty if I'm under 59.5?

Yes, unless the withdrawn amount was part of a Roth contribution or conversion*. 

*See Two 5-Year Rules For Roth IRA Contributions & Conversions and the sticky thread linked below for qualifiers.

I hope the question makes sense. Basically, if I'm dumping money into an IRA now (I'm 23) will I be able to live off those dividends in 10 years? Without penalty?

See How to withdraw funds from your IRA and 401k without penalty before age 59.5.