IRA Rules for Early Withdrawal

By Stephanie Powers

  • Overview

    You can take early withdrawals from your IRA, but it may cost you. Individual Retirement Accounts (IRAs) are designed to provide tax deferred savings for retirement. If you decide to take funds out early, the IRS may charge taxes and a penalty.
  • History

    IRAs were designed to give individuals control over their own retirement savings as employers and the government reduces retirement plans. The rules for IRA distributions sometimes change. For example, during times of severe economic hardship, such as after a hurricane, the IRS slackens the rules on penalties for early withdrawal.
  • Significance

    Taxes paid on early IRA withdrawals reduce the amount available at retirement. Understanding the rules of early distributions may save IRA owners from paying unnecessary taxes.


  • Early Withdrawal Penalty

    Individuals control distributions from IRAs, regardless of their age, but in order to encourage retirement savings, the IRS imposes a 10 percent penalty on withdrawals before age 59 ½. Withdrawals can be taken from a traditional IRA after the owner reaches age 59 ½ without a tax penalty. Amounts withdrawn before age 59 ½ are considered early withdrawals. For example: John is 50 years old. He takes $5,000 out of his IRA to buy a jet ski. Because John is under the minimum distribution age and his reason for the withdrawal is not one of the exceptions to the rule, his withdrawal is taxable and an additional 10 percent penalty is due to the IRS. Withdrawal $5,000 Minus taxes $5,000 x .20 =$1,000 Minus penalty $5,000 x .10 =$500 Total taxes $1,500 Net amount of withdrawal $3,500
  • Penalty Exceptions

    Some exceptions to the 10 percent penalty rule are: IRAs inherited from another and not treated as your own; withdrawals are used to pay college tuition and expenses; first time homebuyers use funds from their IRA to assist in the purchase; distributions are taken in equal payments over the life of the owner; the IRA owner is disabled; withdrawal is used to cover unreimbursed medical expenses greater than 7.5% of adjusted gross income or used to pay medical insurance premiums while unemployed; one was economically harmed by hurricanes Katrina, Rita or Wilma and took a distribution before 2007; non-deductible IRA contributions were withdrawn before taxes are filed; and one was a reservist called to duty between 2001 and 2007.
  • IRA Type Determines Taxability

    A major difference in the taxability of early IRA withdrawals is whether or not the account is a traditional IRA or a Roth IRA. Roth IRA withdrawals are not taxable if contributions are held for 5 years, the owner is 59 ½ years old or the any of the exceptions for tax penalties occurs. Traditional and SEP IRA withdrawals are taxable and penalties may apply if the owner is less than 59 ½. SIMPLE IRA contributions must be held for 2 years or a penalty of 10 to 25 percent is applied. IRA early distribution rules apply to the separate accounts of qualified employer retirement plans that are treated as IRAs. This includes 40(k), 403(a), 403(b) and 457 plans where employees defer salary amounts into IRA accounts.
  • Identification

    Individuals who withdraw funds from their IRA for any reason receive an IRS 1099-R form from the financial organization that holds the IRA stating the amount and type of withdrawal.
  • Considerations

    Most brokerage firms will allow an individual to determine whether taxes are withheld from distributions. The IRA owner is still liable for the taxes, but may delay paying the taxes until tax forms are filed. This may be a good option when the individual either plans to repay the distribution or if funds will be available to pay the tax when taxes are filed.
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