IRA early withdrawals

Traditional IRAs:

If you're younger than 59 ½ , you will get hit with a penalty for early withdrawals from traditional IRAs. But you can escape that 10% tax penalty if you're withdrawing the money for a few specific reasons.

These include:

  • Paying college expenses.
  • Paying medical expenses greater than 10% of your adjusted gross income.
  • Paying for a first-time home purchase.
  • Paying for the costs of a sudden disability.

Also, if you put money into your IRA but then decide you need it back, you can generally "take back" one contribution made to a traditional IRA without paying tax, as long as you do it before the tax filing deadline of that year and do not deduct the contribution from your taxes.

You can also withdraw money from a traditional IRA and avoid paying the 10% penalty if you roll the money over into another qualified retirement account (such as a Roth IRA) within 60 days. But then you wouldn't actually be able to spend it.

If you're really that desperate for cash, it is possible to take money out of your traditional IRA in what's called "substantially equal periodic payments." Here's how it works: The IRS will determine what amount you can receive each year based on your life expectancy. That's the amount you must withdraw each year.

The method is certainly not without risks. Once you start substantially equal periodic payments, you can't stop the payments until you're 59½ or five years have passed, whichever is longer. So there's no changing your mind. If you change or stop these withdrawals at any time, you'll get hit with that 10% penalty -- applied retroactively from the time you first began receiving payments. So it's generally not a great idea if you're under 50. Even if you are over 50, you'll be eating away at your retirement nest egg, rather than building it up. That means you're likely to come up short when you actually do retire.

Roth IRAs:

You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make "qualified distributions" in retirement, you must be at least 59 ½ years old, and at least five years must have passed since you first began contributing.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you'll be penalized for withdrawing any investment earnings before age 59 ½, unless it's for a qualifying reason, which are the same as those for a traditional IRA.

Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after the conversion.

Not sure whether the money will be counted as contributions or earnings? Well, the IRS views withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let's say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.

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