When Can You Withdraw Money From Your IRA Early?
You can always withdraw money from your traditional or Roth individual retirement account (IRA), though you may pay a 10 percent penalty if you do so before the year you turn 59 1/2. In some cases, you can avoid the early withdrawal penalty if you qualify for an exception such as using the money to pay for a first home.
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Function
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IRAs give you a tax break to put money aside for retirement. You can use IRA contributions to purchase various financial products, like stocks, bonds and CDs, in addition to nontraditional assets like shares in business start-ups and real estate. The Internal Revenue Service (IRS) does not tax any earnings these assets make as long as you keep them in the account. Because you are free to let your IRA's earnings compound until retirement, this type of account is most effective if you do not withdraw money early. The IRS's 10 percent penalty is intended to discourage you from taking withdrawals (distributions) before you turn 59 1/2.
IRA Types
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Early distribution rules are different for traditional and Roth IRAs. The IRS charges income taxes on all traditional IRA distributions, even those you take after you turn
59 1/2. Amounts you take before that point are subject to income taxes, plus the 10 percent penalty. Roth IRAs function differently: because you do not get a tax break for Roth IRA contributions.. You are free to withdraw the entire amount of your contributions at any point without owing income taxes or penalties. Amounts that exceed your total contributions may be subject to both tax and penalties.
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Qualified Roth IRA Distributions
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No portion of a qualified Roth IRA distribution is subject to tax or penalty. To take a qualified distribution, you must have made your first Roth IRA contribution at least five years prior-- not necessarily to the account from which you are taking a distribution. As long as this condition is satisfied, your distribution is qualified if you are at least 59 1/2; you are disabled; you use the money to pay for or rebuild your first home, or that of your child, grandchild or ancestor; or if you die and the IRA is distributed to your estate.
Roth IRA Penalty Exceptions
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In addition to qualified Roth IRA distributions, there are situations in which you may pay income taxes on your earnings but avoid the 10 percent early withdrawal penalty. In this case, the most common penalty exceptions include distributions you take to pay for qualifying higher education expenses, including college tuition, for you or someone in your immediate family; using a distribution to pay for your family's health insurance if you are unemployed and covering unpaid medical expenses that exceed 7.5 percent of your income.
Traditional IRA Penalty Exceptions
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There is no waiting period for avoiding the 10 percent traditional IRA early withdrawal penalty. If an exception applies to you, you will owe only income taxes on distributions you take before you turn 59 1/2. Traditional IRA penalty exceptions are mostly the same as those for Roth IRAs: you can take a distribution to buy your first home and pay for college, pay unreimbursed medical bills that exceed 7.5 percent of your income, and pay health insurance premiums if you are unemployed. The death and disablement exceptions apply to traditional IRAs, as well.
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