Penalties for Early Withdrawls from Your IRA
Written by Tina Phu   



 
The purpose of having an Individual Retirement Account is for you to find a way to store your money and receive benefits for doing so. However, what if you need to withdrawal some of that saved up money? Will you be penalized? In short, the answer is “yes.” However, there are situations which provide legitimate reasons that may help you avoid the penalties.


Traditional IRA

Withdrawals from the account are taxed like income and early withdrawals are subject to an additional penalty of 10%. There are eight exceptions for withdrawals. Nonqualified distributions will not be penalized if they
  • Occur because of the IRA owner's disability.
     
  • Occur because of the IRA owner's death.
     
  • Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
     
  • Are used to pay for medical expenses that exceed 7.5% of adjusted gross income (AGI).
     
  • Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
     
  • Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
     
  • Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
     
  • Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.

Roth IRA

There are a few exceptions for nonqualified distributions from a Roth IRA.  Barring these exceptions, withdrawals before the owner has reached 59 ½ years of age or before the money has been in the account at least five years will be taxed and the earnings will incur a 10% penalty. Nonqualified distributions that will not be penalized if they
  • Occur because of the IRA owner's disability (review IRS Code Section 72(m)(7) and IRS Publication 590 for more information).
     
  • Occur because of the IRA owner's death.
     
  • Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
     
  • Are used to pay for medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
     
  • Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
     
  • Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
     
  • Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
     
  • Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.

Simple IRA

Withdrawals from the account are subject to taxation, and early withdrawals (withdrawals before you reach age 59) are subject to a 25% tax.


Simplified Employee Pension (SEP) IRA

Withdrawals are subject to taxation and are subject to the same withdrawal rules as the traditional IRA. There is a penalty for early withdrawal (withdrawals before you reach age 59).



 
Last Updated on Wednesday, 22 December 2010 06:23