IRA Early Withdrawals

Contributions you make to your individual retirement account (IRA) are generally not supposed to be available for your use until you reach age 59-1/2. As a practical matter, though, you are always free to take out the money and use it any time you want. Making an early withdrawal, however, will cost you and should be considered carefully before being done.

If an early withdrawal is made, a person has to pay regular income tax on the withdrawn amount, plus an additional 10 percent penalty tax on the amount that is included in gross income. After taxes and penalties are imposed, you will be lucky to see (let alone use) half the money you take out of your IRA. That is why taking an early distribution is not a recommended option, except in the most extreme circumstances.

Financial Calculators The IRS requires that you withdraw at least a minimum amount, known as a required minimum distribution, from your retirement accounts annually, starting the year you turn age 70-1/2. Use this Required Minimum Distribution Calculator to calculate the amount that must be distributed. IRS rules allow for penalty-free withdrawals from retirement accounts. You may begin receiving money from your retirement accounts before you reach age 59-1/2, without the normal 10 percent penalty. Use this 72T calculator to determine your allowable 72T Distribution and how it can help fund your early retirement.

As in so many areas of life, there are a number of exceptions to the restriction on early IRA withdrawals. Although regular tax is still imposed, the 10 percent penalty is not imposed in the following situations:

• You have unreimbursed medical expenses that are more than 7.5 percent of your adjusted gross income.
• The distributions are used to pay the cost of your medical insurance after losing your job and receiving unemployment compensation for 12 straight weeks. The distributions must also be received in the year unemployment compensation is received or the following year, and no later than 60 days after you are reemployed.
• You are disabled and can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition.
• You withdraw money as the beneficiary of a deceased's IRA.

Tip If you inherit a traditional IRA from your deceased spouse, but elect to treat it as your own or roll it over to your own IRA, a later early distribution may still be subject to a penalty tax.

• You are receiving distributions in the form of an annuity that is part of an IRS-approved distribution method.
• The distributions are used to pay for your qualified higher education expenses (i.e., post-secondary education tuition, fees, books, supplies, and equipment, plus room and board if at least a half-time student).
• You use the distributions to buy, build, or rebuild a first home, provided the money is used to pay qualified acquisition costs before the close of the 120th day after you enter into a contract to buy the home or the building/rebuilding of the home begins.
• The distribution is due to an IRS levy. (Although not a big surprise, it's still nice that you don't have to pay a penalty to hand over all your savings to the IRS.)
• Under the Pension Protection Act of 2006, a qualified reservist distribution after August 17, 2006, from an IRA or attributable to elective deferrals under a 401(k) plan, 403(b) annuity, or certain similar arrangement is not subject to the 10 percent early withdrawal tax if a qualified reservist was ordered or called to active duty for a period in excess of 179 days.

Financial Calculators When you are the beneficiary of a retirement plan, specific IRS rules regulate the minimum withdrawals you must take. If you want to simply take your inherited money right now and pay taxes, you can. But if you want to defer taxes as long as possible, there are certain distribution requirements with which you must comply. Use this Beneficiary Required Minimum Distribution Calculator to determine your Required Minimum Distributions (RMD) as a beneficiary of a retirement account.