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IRA Early Withdrawal Rules and Penalties


When you deposit cash into your retirement account, it enters a new realm of rules and regulations. While your IRA contributions are still your money, they’re subject to withdrawal penalties, taxes and exceptions that allow you to withdraw money for specific expenses. As a result, withdrawing from your IRA for a surprise expense isn’t as simple as taking money from your checking account. If you need to access money early from your IRA, you might want to think twice. Here are the rules and penalties that might hurt you. 

A financial advisor can help you create a retirement account withdrawal strategy. Speak with an advisor today.

What Are the Withdrawal Penalties for IRAs?

IRA withdrawal penalties depend on various factors, including account type, account holder’s age and reasons for the withdrawal. Here are the rules for different IRA types:

Traditional IRA Withdrawal Penalties

Traditional, Rollover and SEP IRAs share the same early withdrawal rules. Generally, unless you meet the criteria for an exception, the IRS penalizes withdrawals before age 59 1/2 with a 10% fee. So, if you withdraw $10,000 before that age, you could owe the government $1,000 for accessing your money early, in addition to state and local income taxes.

If you have a SIMPLE (Savings Incentive Match Plan for Employees Individual Retirement Account) IRA, the early withdrawal penalty generally increases to 25%, if it’s within the first two years of participating in the plan.

Take note: While withdrawals aren’t mandatory after turning 59½, you must start taking required minimum distributions (RMDs) upon turning 73. Failing to take your RMDs can result in a 25% penalty of the amount you were supposed to withdraw.

Do you need help figuring out your required minimum distributions? Try SmartAsset’s RMD calculator to learn more.

Roth IRA Withdrawal Penalties

Roth IRAs have the same minimum age withdrawal limit of 59½. However, because Roth contributions aren’t pre-tax, they also have additional rules.

First, your contributions are accessible at any time and for any purpose. This freedom in withdrawing money is because you’ve already paid income taxes on that money. So, the withdrawal rules for Roth IRAs affect earnings and any funds from IRA conversions but never your original contributions.

Additionally, tax laws dictate that you must hold your Roth IRA for five years and be age 59½ to avoid the 10% penalty on withdrawing earnings and conversions. So, you will need to meet both the age and holding period requirements to avoid withdrawal penalties. But, the IRS can also waive these requirements if you meet the criteria for an exception.

IRA Early Withdrawal Rules and Penalties Exceptions

A man researching the requirements to qualify for an IRS exception to make an early IRA withdrawal without penalty.

You can avoid the 10% penalty if you’re withdrawing money for a reason that the government deems as an exception. Here are eight situations when you could qualify for a penalty exemption from the IRS:

  • You can withdraw up to $10,000 to help with a first-time home purchase.
  • You use the withdrawal money to pay for qualified education expenses, such as tuition, fees and books.
  • You can make a withdrawal to pay for expenses associated with disability, terminal illness and death.
  • You can withdraw up to $5,000 for birth and adoption expenses.
  • You can make a withdrawal to pay for healthcare costs, if your out-of-pocket medical expenses are more than 7.5% of your adjusted gross income (AGI). But only the amount you withdraw to cover the portion above 7.5% is exempt.
  • You can withdraw money to cover health insurance expenses if you’re unemployed for at least 12 weeks.
  • National Guard members and reservists can make withdrawals without penalties after 180 days of active duty.
  • Rule 72(t) allows early withdrawals without penalties if you take at least five equal periodic payments from your account over at least five years. The IRS limits the ways you may withdraw by providing three methods for you to choose from. Take note: you can’t opt out of this path once you start, and you lose the ability to contribute to the account in the future.

Alternative Solutions

Early withdrawals from an IRA can trigger penalties and put your retirement plan at risk. But if you need to take out money, here are four common alternatives that could help you without jeopardizing your nest egg:

Home Equity Loan

A home equity loan lets you turn the equity in your home into a second mortgage. For example, if you have a $200,000 mortgage and your house is worth $300,000, most lenders will lend you about 80% of your equity. You can use this money for any purpose and will repay the loan in monthly installments.

Like your original mortgage, this loan uses your home as collateral, meaning you could lose your it if you default. You’ll also pay closing costs between 2% and 5% of the loan amount. Lastly, this option (and the options below) have credit score requirements, which can hinder your eligibility if you have suboptimal credit.

Cash-Out Refinance

A cash-out refinance is another equity-based tool that provides you with a lump sum. However, instead of creating a second mortgage, your lender replaces your original mortgage with a new one.

This option is more advantageous than a home equity loan if you can get a better interest rate by refinancing or if you can get rid of mortgage insurance premiums. Refinancing can also lower your monthly mortgage payment, providing budgetary relief in addition to the lump sum.

Personal Loan

If you lack the equity or don’t own a home, personal loans are accessible options for renters and homeowners alike. These loans are usually unsecured, meaning you don’t provide collateral. As a result, you don’t risk property or possessions by taking out this loan. Plus, you don’t pay closing costs for personal loans. However, interest rates are generally higher, increasing the cost of borrowing.

0% APR Credit Card

One way credit card companies attract new customers is 0% APR cards. These offers usually include a period of 12 to 18 months where balances incur zero interest. This way, you can open a card, charge expenses, and carry a balance during the introductory period for free. However, interest rates usually climb to at least 20% after the promotional period expires, so it’s essential to pay off the card before then.

0% APR cards also allow you to pay off another credit card (known as a balance transfer). You won’t pay interest on the new balance, but balance transfers typically cost 3% of the amount to perform.

Bottom Line

A couple trying to figure out alternatives for getting money without incurring an early withdrawal penalty from their IRA.

Understanding the withdrawal penalties associated with both traditional and Roth IRAs is essential for maintaining the integrity of your retirement savings. Early withdrawals incur a 10% penalty in most cases, emphasizing the importance of careful planning and consideration of exceptional cases to avoid unnecessary fees.

Tips for IRA Early Withdrawal Rules and Penalties

  • Financial emergencies can leave you scrambling for a solution. A financial advisor can help evaluate your finances to create a sustainable plan for your future. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Inheriting an IRA exempts beneficiaries from early withdrawal penalties. However, structuring your withdrawals from an inherited account can be tricky, creating unwanted tax implications if you aren’t careful.

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