If you are thinking of withdrawing from your IRA, and you are under the age of 59.5 years old, there is typically a fee associated with doing so. An IRA is meant to be money available for when retirement comes around, which is why there is a fee applied to early withdrawals to reduce frequent withdrawals throughout the years.
The ten percent fee is apart from the possible taxes you have to pay on the money taken out of the IRA. Though, there are exceptions to this rule that you need to know about, and in this article we will go over the IRA withdrawal penalty and ways you can avoid this penalty. Withdrawing from an IRA can still come with other possible taxes so it is good to know what to expect from a financial adviser.
IRA Withdrawal Penalty
An IRA withdrawal penalty is given since this account is specifically for retirement. If you decide to withdraw before the age of 59.5, there is a 10 percent tax penalty given if you fall under that age range. So what exactly is an IRA withdrawal penalty and how can you avoid this by meeting specific requirements or buying specific things?
- What is an IRA Withdrawal Penalty?
- What to Know Before Withdrawing
- How to Withdraw from an IRA
- Ways to Avoid an IRA Early Withdrawal Penalty
What is an IRA Withdrawal Penalty?
Money taken out from an individual retirement account (IRA) with have a 10 percent early withdrawal penalty to the individual who is not over the age of 59.5 years old. This withdrawal will be included in gross income comes taxes which is why it incurs a penalty. The taxes and penalties do vary according to the retirement account type, Roth or traditional. If you do plan to withdraw money early know that there may be a 10 percent withdrawal fee, the withdrawal may be taxed and you may qualify for an exception to the penalty if you meet the requirements.
What to Know Before Withdrawing
If you are considering a withdrawal from your individual retirement account, there are some things to consider to see if this is the right move for you. It is best to consult with your personal tax advisor to find out if this is a good decision, since the possibility of being taxed and a 10 percentage fee is something to look over. If you are going through a particular situation where you need the money, the exceptions to the penalty fee might cover a particular situation you are going through.
It is also wise to have some cash available or to sell some investments. In case the money in the individual retirement account is not sufficient for what you need, you can sell some assets you have as well. We will also go over some of the ways to avoid the penalty so you can see if you qualify for an exception to the fee before you start withdrawing.
How to Withdraw from an IRA
In your account, you have to select the IRA which you want to withdraw from and choose how you would like to receive the money. Enter the amount you want to withdraw and specify the tax withholding. You can also sell securities if there is not enough of the amount of cash available that you want to withdraw. Make sure to review the information before hitting the submit button on the account.
Ways to Avoid an IRA Early Withdrawal Penalty
There are ways to avoid an IRA early withdrawal penalty. To learn about the different ways that are possible can help you to better access your money if your situation meets a requirement to avoid a fee. The following are ways to avoid the ten percent penalty:
- Do not take out money from your IRA until you turn 59.5 years old: Once you reach 59.5 years old, you can take whatever amount you see fit once you reach this age without a 10 percent fee. There will still be an income tax for each withdrawal though.
- IRA withdrawals for college costs: If you need to take out some money to pay for college fees like tuition, books, supplies and other college-related fees, there is no penalty for taking out money from your IRA. You can also use money to pay for room and board as long as you are a part-time student. You should take into account that the withdrawals are taxable income which may affect your financial aid.
- IRA withdrawals for health insurance costs: You can take out from your IRA without fees if it is to pay for health insurance for you or your dependents. You also have to be collecting unemployment compensation for 12 weeks straight. The withdrawal has to occur in the same year or the next year you were receiving unemployment benefits. This also has to be before you have a new job that you started two months ago or more.
- IRA withdrawals for medical costs: Withdrawals that are used to pay for medical costs not covered by health insurance and which surpass 10 percent of your adjusted gross income do not have a penalty.
- IRA withdrawals to pay for a disability: Withdrawals which are used for those with severe physical and mental disabilities have no fee if they can receive a doctor’s note to attest to the severity of the disability.
- IRA withdrawals for a first home buy: If you are going to buy or build a first home you can withdraw up to $10,000, double for couples, without incurring a fee. You must not have owned a home two years before buying a home. If for some reason the home purchase is canceled or delayed, then you can put the money back into the IRA within 120 days without a penalty.
- IRA withdrawals for military service: Members of the military who have been on active duty for more than 179 days do not have to pay the ten percent withdrawal fee.
- Roth IRA withdrawal: A Roth IRA often has fewer restrictions, you may withdraw contributions but not earnings from the account that is at least five years old.
- Annuity: If withdrawals are used as a series of annuity payments, there is no fee. An IRS-approved distribution method with at least one annual withdrawal is required to avoid the fee. This usually requires professional assistance to calculate things like life expectancy.
- Put money in a 401(k): Those who leave their jobs once they turn 55 or older can withdraw from their 401(k) without paying a fee, unless it is rolled over into an IRA.
- Inherited IRA: If you inherited an IRA before turning 59.5 years old, you can take fee-free withdrawals but still have to pay income tax on each withdrawal. If this is inherited from a spouse though and you choose to treat it as your own, you will still be subject to the penalty.
When you have a retirement account, it is important to specify in your summary plan description when a distribution can be made. The summary description also should be clear whether the plan allows for early withdrawals or hardship distributions. An IRA can be a great account to have to help you during unforeseen events but withdrawing from it can come with fees and taxes.
If you do meet one of the requirements to avoid the ten percent fee, then you can withdraw at anytime and only worry about possible taxes on income. Meet with a financial professional to learn more about an IRA and what you can do in case you need to withdraw money. If you want to focus on your trading, we offer tools and resources for free. Join one of our free webinars to learn more about how you can grow your account and join our community of successful traders.