Should You Withdraw Your IRA Early?

Life happens and when it does it probably means you need some extra cash. If your only savings are in an IRA you may be considering withdrawing money early. There are penalties for early IRA withdrawal and you will want to make sure you fully understand them before making a decision to pull money from your IRA.

When you take money out of IRA before the age of 59 ½ the IRS considers this a premature distribution. In addition to owing income tax on the money you will also face a 10% penalty on the amount you take out. Depending on how much cash you need to pull out this 10% penalty can get pretty hefty.

There are a few circumstances however where you can pull money out of your IRA early and not be penalized. The first is for education. The IRS does not access a penalty if your IRA money goes towards qualified schooling expenses for yourself, your spouse, your children or grandchildren.

The second reason you can pull money out of your IRA and not be penalized is buying your first house. The government offers all sorts of incentives for first time home buyers and bending the rules a little on your IRA is one of them.

You can use up to $10,000 from your IRA to wards the purchase of your new home if you are married both you and your spouse can pull out $10,000 each. Oddly, first time home buyer is not determined just by it being your first house ever you can qualify as long as you or your spouse has not owned a house in 2 years even if you did own one before.

There are also certain medical situations that allow you to use your IRA funds with no penalty. The first is being permanently disabled which allows you to start collecting from your IRA before you reach 59 ½. The second is medical bills. If your non-reimbursed medical expenses total more than 7.5% of your adjusted gross income you can use IRA funds to pay them with no penalty.

If you are going to pull out money from your IRA to use for one of these approved circumstances timing is everything. You must use IRA funds within 120 days of withdrawal to pay for your qualified expenses to avoid the IRA penalty.

If you want to money out of your IRA the best thing to do is consult with a tax professional about your particular situation to find out if it is advantageous for you to do so.