What Are Tax Penalties With Early Withdrawal of IRA Funds?
In order to prevent people from using IRA account for purposes other than saving for retirement, there is a penalty on withdrawals before retirement age. For the purposes of IRA accounts, retirement age is considered 59.5.
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Types
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For most IRAs, the penalty is 10 percent of the amount withdrawn. However, if you are taking a withdrawal from a SIMPLE IRA that you started within the past two years, the penalty is 25 percent of the amount withdrawn.
Calculating Your Penalty
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If you take an early withdrawal, either qualified or non-qualified, you must fill out Form 5329 showing the amount you took out to calculate the penalty that you have to pay.
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Reporting
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You must file your taxes using either Form 1040 or Form 1040NR if you have taken an early withdrawal from your taxes. Usually you must also include the distribution in your taxable income for the year.
Exceptions
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There are several exceptions that allow you to withdraw money before age 59.5 without paying the early withdrawal penalty including permanent disability, up to $10,000 for a first-time home purchase.
Additional Requiremens
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According to the IRS, for Roth IRAs, in addition to waiting until you are 59.5, you also have to wait at least five years from the time the Roth IRA was set up to avoid the early withdrawal penalty.
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