Can I Cash Out My IRA Before Age 59 1/2?
IRAs are intended for retirement savings, and the IRS imposes strict withdrawal regulations before age 59 1/2. There may be exceptions; see here for details.
Money taken out of an IRA before reaching age 59 1/2 usually incurs an additional 10% penalty fee; however, in certain circumstances you may be eligible to access your savings without incurring this levy.
Taxes
Your type and rules associated with an IRA could impact how taxes are charged when withdrawing funds. Traditional, SEP, and SIMPLE IRAs offer tax-deductible contributions and tax-deferred earnings; distributions are subject to income tax plus an early withdrawal penalty of 10% unless an exception applies.
There are certain exceptions, however, including purchasing your first home or paying higher education expenses. Other situations allow distributions without incurring penalties such as changing employment status or receiving unemployment compensation payments.
If you are self-employed or run a small business, an SEP or SIMPLE IRA could be an excellent way to reduce risk with lower-risk investment options such as FDIC-insured certificates of deposit and money market savings accounts. With U.S. Bancorp Investments you may even have access to stocks and mutual funds1 with dedicated wealth professionals helping manage them.
Withdrawals
When withdrawing money from their IRA prior to age 59 1/2, generally they must pay income taxes as well as a 10% penalty fee. But there may be exceptions.
Two uses for the money are to cover unreimbursed qualified medical expenses that exceed 10% of your adjusted gross income and to purchase your first home. Up to $10,000 penalty-free can also be taken out to cover costs of purchasing, building or rebuilding a house for yourself, your spouse or a qualified child.
Joelle Spear of Canby Financial Advisors in Framingham, Massachusetts notes that withdrawing money for higher education costs without incurring penalties can also be done without incurring penalties, and includes books, tuition, fees and room and board for your spouse or child attending school at least half time. However, you must spend it within 120 days to avoid using it to cover other unnecessary expenses.
Penalties
Savers who withdraw funds from their retirement accounts prior to turning age 59 1/2 usually incur a 10% penalty in addition to income taxes on any amounts withdrawn, although there may be certain exceptions whereby an IRA account owner may take withdrawals without incurring this charge – consulting with a financial advisor can provide insight into these exceptions and assist in understanding them fully.
When purchasing a home or paying medical bills, withdrawals from traditional and Roth IRAs without penalties may be appropriate. But for any other purpose than these two expenses, alternative means should first be explored before raiding retirement savings accounts.
Withdrawal penalties exist to deter savers from withdrawing their nest eggs too quickly, and limit the number of retirees who become dependent upon government assistance during retirement. To gain more insight into the different IRA options, speak with a financial advisor who can review your circumstances and advise the appropriate account type for you.
Rollovers
Direct rollover is the easiest and safest way to move retirement savings between accounts without incurring penalties and taxes, as the trustee of your old account sends directly a check to your new provider. This process must be completed within 60 days from receiving the distribution; although shorter timespan options may be possible based on specific IRS regulations.
These rules stipulate that your trustee withhold at least 10% (up to 20%) of any distribution for federal income taxes and early withdrawal penalty payments, then redeposit the funds within 60 days in your new IRA.
Change IRA custodians that offer lower fees or wider investment choices is another viable solution, though this constitutes an indirect rollover and could incur tax penalties for not doing it within 60 days. Please consult with your financial advisor when considering this strategy.
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