Can I Cash Out My IRA Before I Turn 59 1/2?

IRS taxes early IRA withdrawals as ordinary income and usually assesses a 10% penalty; however, in certain circumstances there are exceptions which could reduce or eliminate this fee altogether.

First-time homebuyers may withdraw up to $10,000 without penalty; similarly, permanent disability and being called up by active duty military reservists qualify.

Taxes

Individual Retirement Accounts (IRAs) allow you to save for retirement on a tax-deferred basis, with traditional and rollover contributions typically pre-tax while Roth contributions after-tax. When withdrawing distributions, they are taxed as ordinary income unless an exception applies; additional information regarding withdrawal rules and penalties can be found in IRS Publication 590-B.

IRAs give you access to an array of assets. For instance, an IRA can help you invest in stocks and mutual funds; or you could open a self-directed IRA (SDIRA).

Traditional IRA owners can take required minimum distributions at any age, though early withdrawal penalties may apply if you withdraw before reaching age 59 1/2. If this applies to you, IRS Form 5329 must be filed.

Penalties

Individual Retirement Accounts (IRAs) are tax-deferred investment vehicles offering a range of savings and investing options, from personal savings accounts to employer sponsored plans such as SIMPLE or SEP IRAs for small business owners. Contribution rules can be complex, with some carrying early distribution penalties if not used appropriately.

Withdrawal limits depend on the type of IRA and age. Traditional IRAs usually offer higher withdrawal limits, while Roth IRAs usually do not. There are exceptions that waive 10% early distribution penalties when withdrawing money early; such as an unreimbursed medical expense distribution of up to $22,000, helping pay natural disaster-related costs, or withdrawing up to $10,000 at once each year for emergency expenses.

Required Minimum Distributions (RMDs) must begin no later than April 1 of the year following your 72nd birthday unless you still work full-time or meet one of the RMD exceptions. Failure to take an RMD may incur a penalty equaling 50 percent of what was missed out of withdrawal.

Expenses

Cashing out an IRA incurs several costs, such as taxes and penalties, in addition to forgoing its potential long-term growth.

If you take early withdrawals from an IRA before age 59 1/2, the IRS imposes both income tax and a 10% penalty; with some exceptions such as purchasing your first home or meeting education costs. They also charge penalties if disabled individuals take substantially equal periodic payments (SEPPs).

The Internal Revenue Service allows penalty-free distributions from an IRA when used to cover out-of-pocket medical expenses that exceed 7.5% of adjusted gross income, such as deductibles and copays not covered by insurance policies. They also allow withdrawals without penalty for emergency personal expenses like unplanned debt or natural disaster relief costs; withdrawals made using your IRA also qualify if used to cover qualified higher education expenses such as tuition fees, books supplies as well as room and board for yourself, spouse or children.

Other Options

Before making a major financial decision, carefully evaluate all your options. For instance, if you are under age 59 1/2 and withdrawing from an IRA early withdrawal penalty may be waived if it’s used for one of the following purposes:

Medical expenses: Your IRA funds may be distributed tax-free for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income (AGI). Loss of job: Withdrawn funds may also cover compensation payable upon termination; unemployment benefits or qualified disaster losses qualify as eligible expenses.

Roth IRA: Once your Roth account meets its five-year rule, withdrawals are free from penalty. Additionally, penalty-free distributions can be made by converting it to a traditional IRA and then making distributions from it.

Consider making a lump-sum withdrawal in kind in order to avoid incurring fees. A Thrivent financial professional can assist in evaluating your options and developing the optimal withdrawal strategy for you. However, this information should not be seen as a replacement for seeking professional tax, legal or investment planning advice from qualified sources.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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