Penalty for Early IRA Withdrawal

Arrangements like the IRA exist pretty much in every country across the world. The point of the IRA is that post your retirement, once your sources of income have dried up, you do not want to end up stranded with no money. So the IRA (Individual Retirement Account) has been created in the United States to provide a source of income to people, once they have retired.

IRA Early Withdrawal Penalties

Often it may happen that you're short of cash and you wish to not sell any assets to raise the cash. And the lenders are also unrelenting in parting with some of their funds for your benefit. In such cases, the only source of income left to you to cover the expense which you might be incurring is the IRA account. An early withdrawal basically means that you are withdrawing money from the IRA before the age of 59 ½ years, which is the age at which you can take a withdrawal without any penalties.

So if you take the money out from the traditional IRA, before you turn 59 ½ years old, then the penalty which you have to pay is an additional 10% tax over and above the present tax that you are paying. The Roth IRA will also charge a penalty at the same interest rate of 10% if you withdraw before the age. In case of the simple IRA, if you have been participating in the simple IRA plan for less than 2 years, you may have to pay a penalty of around 25% over the regular state and federal taxes you are currently paying.

The rationale behind the IRA penalty for early withdrawal is that since the part of your income which went into your IRA account was exempt from taxes, the early IRA withdrawal means that you are using the money and it is increasing your income and hence, the tax penalty is imposed.

Exceptions for IRA Early Withdrawal Penalty

Of course, there are some cases where the IRS will excuse you for withdrawing money from the IRA prematurely. Here are some of the common cases where the IRA early withdrawal penalty will be waived.

• Disabled Persons: A person who has been disabled before turning 59 ½ years old can take the money from the IRA account without incurring the penalty. The disability clause is only for those who are permanently disabled.
• Death: If the IRA account holder happens to die before the age of 59 ½, then the heirs to the estate of the deceased do not need to pay the 10% penalty
• First Time Home Purchase: The IRS recognizes that the first home purchase can be a pretty expensive affair, hence an amount up to $10,000 is exempt from the penalty.
• Higher Education: Costs of higher education can be offset against the IRA withdrawal and there is no IRA early withdrawal penalty in this case.
• Medical Insurance Premium: If you have been unemployed for over 12 weeks, then you probably do not have money to pay for your medical insurance premium. So in such a case again there is no IRA early withdrawal penalty for withdrawing the money early.

So, this was all about the IRA early withdrawal penalty. Now that you know what is the tax penalty for early IRA withdrawal and in which cases it is exempt from the penalty, then you probably will be able to take a better decision about it.