Early IRA Withdrawals

After spending all of this time trying to build the assets in your IRAs, the day will eventually come when you need to access those funds. Once you turn 59½, you can make a withdrawal at any time without penalty. However, what happens if you need the money before then?

If you are under 59½, there could be some problems. Generally, there is a 10% premature distribution penalty on the taxable amount you take out of a Traditional IRA, in addition to a possible state penalty. State and federal income tax would also be assessed against your withdrawal, since the distribution is considered ordinary income by the IRS in the year you withdraw it. If a distribution is taken from a Roth IRA before age 59½, and the account has been opened for less than five years, the earnings will be subject to a 10% premature distribution penalty, as well as state and federal income tax.

Two major exceptions to the early withdrawal policy are for first-time home buyers and for educational purposes.

First-time home buyers, defined by the IRS as not owning a home in the past two years, can withdraw up to $10,000 from an IRA to help make a down payment. You pay ordinary income tax on any pre-tax contributions and earnings, but there is no penalty. If the Roth IRA had been open for less than five years, there would still be no penalty; however, you would have to pay taxes on any earnings.

You can also withdraw funds from an IRA to pay for your child's college expenses. The same rules about taxing contributions and earnings apply, and this withdrawal is penalty-free. For students enrolled at least half-time, covered costs would include tuition, fees, supplies, equipment, room, board, and books.

There are only a few other instances where anyone under the age of 59½ would be allowed to access IRA funds without penalty – death, disability, and some medical expenses. Contributions to a Roth IRA can also be withdrawn at any time without penalty. In some instances, early withdrawals can be made penalty-free if the investor uses a series of substantially equal periodic payments.

Although the tax code allows these withdrawals, they may not be a good idea except as a last resort. You could be better off investing for a new home or your child's college education separately from your retirement accounts.

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