IRA and Early Withdrawal Rules

In today’s struggling economy, many people may need to know if they can use funds from their individual retirement accounts to help them through the difficult months while retaining as much retirement protection as possible.  There are a number of types of retirement accounts that have differing protections, advantages, disadvantages, and benefits. Below is an overview of the Penalties and Exceptions allowed for Early IRA Withdrawals. See also Early 401k Withdrawals.

Roth IRA is a flexible account with more creative investment options. 

• Contributions are taxed
• Withdrawals on contributions (not income) are not taxed
• Earnings may be withdrawn after 5 years participation for those 59 ½ or older

Simple IRA is an employer-managed retirement account for small companies with fewer than 100 employees

• Contributions not taxed
• Withdrawals are taxed  

Traditional IRA is an individual retirement account with greater flexibility

• Contributions are tax deductible
• Distributions taxed as ordinary income
• Mandated distributions begin at age 70 ½

Early IRA Withdrawal Penalties

Most IRAs have penalties for withdrawal before the age of 59 ½.  These penalties vary by type:

• Roth Ira – for non-qualified withdrawals the penalty includes the standard tax rate plus 10%
• Simple IRA – 25% for early withdrawals
• Traditional IRA – 10% early withdrawal penalty

Exceptions for Early IRA Withdrawals

There are some exceptions for each of the IRAs that allow early withdrawal without penalties.

• Roth IRA – First-time home buyers may withdraw up to $10,000 tax-free
• Simple IRA – there is a “catch-up” provision for employees over 50, allowing contributions over the standard limits
• Traditional IRA – The 10% penalty for early withdrawal may be waived under certain conditions for up to $10,000 used for first-time home purchases, higher education, death, disability, unreimbursed medical expenses, health insurance, annuity payments and IRS levies

IRA Withdrawal Penalty Calculator

For consumers who wish to calculate the specific penalty that applies to their IRA for early withdrawal, they can find an IRA withdrawal penalty calculator by simply searching the web.  These calculators allow the consumer to input their specific data and learn what they stand to lose by using IRA monies to help shore up their finances during these difficult times.

Can a Tax Lawyer Help?

The laws governing tax exemption with IRAs are very complex and it is often vital to call a tax attorney to help determine how to manage contributions, withdrawals, and rollovers.  Otherwise, there may be serious penalties that counterbalance the benefits of these retirement accounts.