Penalty for Early Withdrawal From IRA Exceptions

There are many regulations regarding tax-advantaged IRAs.

An Individual Retirement Account (IRA) is a tax-advantaged account designed to encourage people to save money and fund their own retirements. The IRS has many regulations regarding withdrawals made from these types of accounts.

The Facts

The tax advantages associated with an IRA apply only if you withdraw the money after age 59 ½. If withdrawals are made early, the IRS can levy a 10 percent penalty.

Significance

The 10 percent penalty is a tax, meaning that 10 percent of your withdrawal amount is added to the amount of tax you owe for the year the withdrawal is made. This is in addition to the entire withdrawal amount being treated as taxable income for that year.

Exceptions

The IRS will waive the 10 percent penalty for expenses, including medical expenses above 7.5 percent of your adjusted gross income, higher education expenses, medical insurance premiums and costs associated with buying or building your first home. The penalty also may be waived if you're disabled or the beneficiary of a deceased IRA owner.

Considerations

You may withdraw any contributions made in the current tax year before that year's tax return is due without paying a penalty, but you also must withdraw any income earned on those contributions and you cannot take a deduction for them.

Roth IRAs

Contributions made to a Roth IRA may be withdrawn at any time without penalty, but earnings on those contributions are subject to a 10 percent penalty under similar circumstances as a traditional IRA.

References

• IRS.gov: Early Distributions
• IRS.gov: Additional 10% Tax
• IRS.gov: Contributions Returned Before Due Date of Return