Can I Cash Out My IRA Before I Turn 59 1/2?
IRAs are intended for retirement savings and withdrawals before age 59 1/2 will usually incur an extra 10 percent penalty in addition to income taxes. There may be certain special circumstances where you can withdraw funds without incurring this additional tax penalty, however.
Consider going back to school, covering medical costs and purchasing your first home as potential solutions.
IRA Rollovers
Rollovers enable you to transfer money from one retirement account into another – typically when switching jobs or retiring. You can either directly or indirectly effect this transfer.
Direct IRA rollovers usually involve your plan administrator sending you a check payable to your new custodian, who then deposits it within 60 days into your new IRA. Please be aware that in addition, 20% must be withheld from each distribution in order to cover income tax liabilities.
Indirect IRA transfers can be more complex. Your plan administrator liquidates assets in your old account or plan, sends you a check made out to you with 20% withheld for taxes as a safeguard and allows 60 days for you to redeposit this money into your IRA, including paying income tax and the 10% early withdrawal penalty fee (this transaction must also be reported on an amended tax return).
IRA Withdrawals
Withdrawals from traditional, rollover, SEP or SIMPLE IRAs are typically taxed as ordinary income unless one of the exceptions apply to you. Typically, required minimum distributions (RMDs) don’t need to begin until age 72 or reaching your retirement eligible date set by the IRS which depends on both life expectancy and when you turn 59 1/2.
If you take money out of an IRA before age 59 1/2, the IRS may charge a 10 percent penalty. There are various strategies you can employ to avoid paying this fee, however.
Depending on your circumstances, qualifying COVID-19 withdrawals allow for up to $10,000 without penalty withdrawal. These could include delayed or revoked job offers, quarantines, lay offs, reduced pay/hours/revenue reduction or business closing as well as withdrawal funds for first home purchase and certain medical expenses – so be sure to speak to a financial or tax professional for more information.
IRA Taxes
IRS taxes distributions from an IRA. Depending on its owner’s age, distributions from this account may incur an additional 10% addition to tax (penalty).
Certain taxpayers may take non-taxable distributions from their IRA accounts for qualifying personal expenses without incurring taxes, also known as qualified charitable distributions (QCDs). A $100,000 limit indexes to inflation.
Typically, when moving money between IRA trustees, 60 days must pass before redepositing funds; you are also only permitted one such transfer annually.
Make sure that beneficiaries are named on your IRA accounts. Otherwise, the money in them would pass to your heirs after your death – including spouses (if applicable), children and other relatives. Alternatively, your estate can manage it as an inherited IRA account.
IRA Investments
IRAs offer tremendous tax advantages, but you must understand your investment options and how they affect your cash outflow. A traditional IRA, for instance, allows your contributions to grow tax-deferred until you withdraw them later on.
Other IRA options include self-directed IRAs, which give access to investments like private placements, hedge funds and real estate; as well as spousal IRAs which permit working spouses to contribute towards retirement accounts of nonworking partners.
There are also employer-sponsored IRAs such as Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE), which allow employees to contribute through payroll deduction. Employers can contribute an amount equal to 25 percent of compensation or $66,000 by 2023 – these have higher contribution limits than traditional and Roth IRAs and are popular among self-employed people and small business owners.
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