After having talked to several people I know about having to withdraw from their IRAs early, I decided to write about it a bit. Withdrawing from a IRA is a fairly simple process that can be done at any time, at any age. You don’t have to be retired to withdraw, however, depending on your type of IRA and personal circumstances, you may have to pay a penalty or fee.

One thing to keep in mind as you read on is that the IRS allows you to return distributed amounts back into your IRA within 60 days of retrieval, without any penalties. This goes for both Traditional and Roth IRA Distributions, but doesn’t apply for a 72(t) withdrawal. This can be applied once every 12 months.

Traditional IRA Distributions

Generally, withdrawals from a Traditional or Rollover IRA are taxed as ordinary income, so no taxes would be deducted from your IRA.
However, if you funded your IRA with tax deductible contributions/pre-tax contributions, your entire withdrawal can be taxed.
If you did a mix of the two above, then only part of your withdrawal is subject to income tax.

If you are under the age of 59 1/2, then the IRS also imposes a 10% early withdrawal penalty. This can be a huge bummer, but if you are eligible you can avoid the penalty:

  • Substantially equal periodic payments: Under Section 72(t) of the IRS Code, an IRA account holder may avoid the 10% penalty by withdrawing fixed amounts at scheduled intervals (ex: monthly or annually). How the amounts are determined, how long you must take them, and several other factors related to 72(t) withdrawals are governed by very specific rules and restrictions. This is a great break, but if you do it wrong you can end up paying the 10% plus an interest amount. We definitely advise consulting with a trusted accountant or financial advisor beforehand.
  • First time home purchase: You can take a penalty-free distribution up to $10,000 to buy, build, or rebuild a first home. You can also take a distribution if it benefits your immediate family members (Ex: Spouse, children, and grandchildren). To qualify, you must have no ownership interest in a principal residence for at least two years.
  • Higher education expenses: You can take a distribution to cover higher education expenses for you or your immediate family members (Ex: Spouse, children, and grandchildren). This can help cover tuition, books, supplies, and can even cover housing.
  • Disability: You may take a penalty-free distribution due to disability. However, the disability has to be severe enough that you can’t participate in any kind of “substantial gainful activity” and a medical professional has to determine that your condition will last at least 12
  • Other:
    In the event of your death, the beneficiary of your IRA doesn’t have to pay the 10%, though they may still owe the tax amount due.
    If you need to pay unreimbursed medical expenses that exceed 7.5% of your AGI, you can quality,
    Also, distributions that pay for health insurance of unemployment benefits and qualified reservist distributions can be exempt.

Roth IRA Distributions

Withdrawals from a Roth IRA follow what is known as “distribution ordering rules”.
First, any withdrawals from a Roth IRA are set in order starting with any previous contributions you made to the IRA, then it goes to previous Roth IRA conversions, then it ends with earnings.

  1. Previous contributions: You can withdraw contributions you’ve already made at any time and at any age, without any taxes or penalties reducing the amount.
  2. Previous Roth IRA conversions: You can withdraw any amount, at any age, that has been converted from an IRA or a qualified plan tax and penalty free after five years. However, if you withdraw without waiting for five years, you are subject to a 10% penalty.
  3. Earnings: Can be withdrawn tax and penalty free after five years if: You’ve reached 59 1/2, the withdrawal is for a first time home purchase, you are disabled, or the IRA account holder has passed away.