Yes, I’m sure you open an IRA so you can secure money for your retirement years. However, what happens if you needed to access that money prior to turning 59 1/2? After all, there is such a thing as “life’s curveballs” (as I like to call them). Taking money out prior to this magical age would trigger those early IRA withdrawals in most circumstances.
Penalties to an Early IRA Withdrawal
Taking a withdrawal early from your IRA will have consequences. First, you will be charged a 10% penalty on the amount you withdrew. Second, you will still have to pay taxes on the amount you withdrew. For example, if you withdraw $50,000 and you are in the 24% tax bracket, you will owe a $5,000 penalty and $12,000 in taxes. This accounts for the early withdrawal penalty and the taxes due respectively. In other words, if you withdraw $50,000, you will really only be getting $33,000 to keep in your pocket.
This brings me to an important fact to keep in mind. If you do decide to take an early IRA withdrawal, always ask for more than what you need.
Exceptions to the Early Withdrawal Penalty
The IRS has listed the exceptions to the early withdrawal penalty. Find them here.
Five of the highlights are as follows:
*qualified higher education expenses
*qualified first-time homebuyers up to $10,000
*amount of unreimbursed medical expenses (>10% AGI for 2021)
*health insurance premiums paid while unemployed
*certain distributions to qualified military reservists called to active duty
What Can You Do?
To avoid an IRA early withdrawal, make sure you have a well-funded emergency fund / savings account. Drawing on this would not trigger any penalty and would also probably get you your money faster. Life WILL throw you a curveball or two (or more!) during your life. It’s best to be prepared so when the time comes, you can rest easy knowing you have the funds available (penalty-free!).
Final Thoughts
Life will throw curveballs. You may find yourself unexpectedly having to make an IRA early withdrawal. I want you to be sure you know the rules for doing so as well as the penalties.
A note about Roth IRAs: You can always withdraw your contributions penalty-free, but there will be a penalty on your earnings if you are not 59 1/2 years old and have not had the account for five years.
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