How to Withdraw From an IRA With Penalties
An Individual Retirement Account (IRA) provides tax advantages for the retirement savings of the elderly. The Internal Revenue Service (IRS) created this individual retirement provision in 1954. The purpose of arranging proper retirement planning is to limit the amount of external taxes. A major concern with an IRA is the rules that apply to withdrawals. There are circumstances that allow for withdrawals without penalties, but most are subject to penalties and taxes unless you follow strict guidelines.
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Instructions
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IRA Withdrawals
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Consider the goals you have in mind for your retirement before investing in an IRA. Be completely certain that you will not need to make early withdrawals just to cover the cost of living expenses that may occur. Since withdrawing from a traditional IRA before age 59 1/2 is a very expensive source of cash, early withdrawals may not be a good choice. Both the original investment and growth are taxed when you withdraw the money. A Roth IRA might be a better choice for some as they grow income tax free, is less costly for early withdrawal and there is no minimum distribution at age 70 1/2.
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Research the rules that apply to making withdrawals. Accessing funds from your IRA varies depending on whether it is a brokerage firm, mutual fund company or a bank. Some allow for online requests, while others require that the request be made in writing. You must also indicate whether you want taxes withheld at the time of distribution or whether you will pay the taxes when you file your income taxes. Contact the financial institution that holds your IRA for specific guidelines. It is important to realize that the reason for contributing to an IRA in the first place is to avoid paying taxes. If you withdraw early, you lose the tax advantages and are required to pay all the taxes immediately.
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Wait until you are 59 1/2 to make a withdrawal from a traditional or Roth IRA in order to avoid paying a 10 percent early withdrawal payment. Not only will you incur a penalty for early withdrawal, but you will be taxed on the money that you withdraw as well. Roth IRA withdrawals are not taxable if contributions are held for five years, the owner is 59 1/2 or any of the exceptions for tax penalties occur.
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There are some exceptions to the penalty rules for early withdrawals from a traditional IRA. These exceptions are death, disability, medical expenses that are not reimbursed and exceed 7.5 percent of your adjusted gross income, and some qualified higher education expenses.
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Consult with a financial adviser or attorney regarding investing in and withdrawing funds from an IRA. Consider the imposed penalties and loss of tax benefits before making the decision to withdraw funds.
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Tips & Warnings
Investigate other ways to meet short- term needs besides withdrawing from your IRA in order to avoid paying penalties and taxes.
IRA accounts should be considered a long-term investment, and withdrawing funds early may jeopardize retirement earnings when you need them most.
