Early Withdrawal From a Rollover IRA
Early withdraw from an IRA comes with significant consequences. They can include taxes, penalties, investment loss and reduced retirement benefits. Understanding the regulations and consequences can provide valuable retirement planning information.
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IRA Distribution Rules
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Distributions from a rollover IRA can be made at any time unlike distributions from qualified plans--such as a 401(k)--that further restrict distributions. However, distribution types and circumstances determine if you will have taxes, penalties or both. If you are age 59 1/2 or younger and take a cash distribution, ordinary income tax will be due on the entire amount of the distribution plus a 10 percent penalty. If you are older than 59 1/2, the 10 percent penalty does not apply, but ordinary income taxes are due. Beginning at 70 1/2, mandatory distributions of a portion of your account balance are required.
Cash Distribution
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Cash distributions from your rollover IRA can be made at any time. If you take a distribution, however, you might find yourself never actually replacing the money in the IRA. So, in addition to the taxes and penalties, your account balance and retirement funds will be depleted. Further contributions are limited and the opportunity cost of forgone investment earnings all negatively affect your retirement.
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Rollovers
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Distributions from an IRA may be rolled over to another IRA and, in some cases, to a qualified plan such as a 401(k). Any rollover IRA retains its tax-deferred status and can continue that status through multiple rollovers. You may be interested in transferring your IRA to another provider, such as from Fidelity to Vanguard. If you have multiple IRAs, you may be interested in consolidating your accounts by rolling them into a single IRA. As long as each IRA is a rollover IRA, the tax-deferred status will be retained.
Significance
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It is critical to understand these consequences and make your decision carefully. While there certainly may be emergencies that cannot be avoided, taking an early distribution of funds from an IRA should be your last resort. The purpose of the IRA is to provide a tax-deferred vehicle to accumulate funds for retirement.
Considerations
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New contributions to an IRA are severely limited; most are limited to $5,000 a year. Each distribution you take reduced the amount you may contribute for the rest of your working life. That, in addition to the lost opportunity to grow the assets, results in a reduced retirement account.
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