IRA Pre-Retirement Withdrawal Rules
An IRA or individual retirement account can provide you with many tax advantages for your long-term savings. Although the Internal Revenue Service imposes certain penalties if you violate any IRA regulations, you are still free to take a distribution from your IRA at any time. One of the main IRA rules is that you cannot take a distribution from your IRA before traditional retirement age without paying a penalty.
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Early Distributions
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IRAs are intended for retirement savings, so the IRS penalizes premature withdrawals. For IRS purposes, an early withdrawal is one taken before age 59 1/2. If you take an early distribution you must pay a 10 percent penalty on the amount of the withdrawal. When you file your taxes, you will have to file Form 5329 to report the amount of your distribution and calculate the amount of additional tax you owe. Ultimately, you will have to report the amount of additional tax on line 58 of your Form 1040.
Exceptions to Penalty
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While most early distributions are subject to the 10 percent penalty, the IRS provides a list of withdrawals you can take without incurring the penalty. Some examples of exceptions to the penalty include distributions for excess medical, higher education and first-time home purchase expenses and if you are disabled. Form 5329 allows you to enter a specific code to indicate that the early distribution should not be subject to the additional 10 percent tax.
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Taxation of Distributions
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All IRA distributions are subject to income tax, including early withdrawals. Whether or not you have to pay an early distribution penalty, you must include the amount of your withdrawal in your taxable income for the year. An exception to this rule is if any of your contributions were non-deductible at the time of contribution.
Required Minimum Distributions
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Even if you are not officially retired at age 70 1/2, the IRS requires you to begin taking distributions from your IRA. The amount of your distribution is based on a formula involving your account value and your life expectancy as determined by IRS tables. If you do not take this distribution you face a 50 percent penalty on the amount you did not withdraw.
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