What Are the Rules for Cashing in an IRA?

Understanding IRA accounts offers investment flexibility, but the IRS imposes rules regarding withdrawing money from them. Learning these rules can help meet unexpected financial needs without undermining retirement savings plans.

If your spouse, children, or you incur certain qualified education expenses, your IRA funds can be withdrawn without penalty to cover those costs.


Owinging money to an IRS and growing it tax-deferred in your traditional IRA may be satisfying, but at some point the IRS wants its share. Under federal law, required minimum distributions (RMDs) must begin coming out from all qualifying accounts by age 7012, otherwise an amount equal to 50% of what should have been withheld as penalties could apply.

To determine your Required Minimum Distribution (RMD), the IRS divides your prior year-end balance of your IRA account by the life expectancy factor from an Empower table. Your RMD can either be taken in one lump sum payment or spread out over multiple years.

If you prefer donating your RMD, an IRS qualified charitable distribution (QCD) allows up to $100,000 of RMDs or other withdrawals directly from an IRA each year without counting as income for tax purposes. Your financial professional can assist in developing strategies for handling RMDs and other retirement account withdrawals.

Early Withdrawals

Even though your contributions to an IRA are tax-deferred, Uncle Sam imposes a 10% early withdrawal penalty if funds are withdrawn before age 59 1/2 – this penalty serves to encourage you to leave it there so it can grow and gain value over time as you approach retirement.

Under certain conditions, exceptions to this rule are permissible. For example, if your unreimbursed medical expenses surpass 7.5% of adjusted gross income during the year that you make withdrawals, penalty-free withdrawals may apply. You could also make them penalty-free if you become totally and permanently disabled, or break up distribution into substantially equal periodic payments (SEPP) over your life time.

As these exemptions can be complicated, you should seek assistance from a tax professional or accountant before taking action against your IRA early. Doing so early could put you behind on reaching your retirement lifestyle goals.

In-Kind Distributions

The IRS wants you to use your IRA for retirement purposes, so they have rules governing withdrawals that can incur steep penalties if broken. But there are ways around these penalties by carefully planning out withdrawals.

One way to sidestep an early distribution penalty is to move investments from your IRA directly into taxable accounts as opposed to taking cash distributions. Each such in-kind distribution will receive its fair market value upon leaving your IRA, providing the basis for future appreciation tax calculations.

In-kind transfers provide another advantage by maintaining exposure to depressed securities and potentially reducing taxes upon their eventual sale. This strategy may prove especially valuable for retirees taking RMDs who do not wish to liquidate IRA positions at low market prices.


If you withdraw your IRA money prior to age 59 1/2, it will be subject to ordinary income taxes on all contributions you made – including nondeductible ones – as well as an early withdrawal penalty of 10% (unless there is an exception applicable to your situation). Consulting a financial advisor may help ensure a more suitable withdrawal strategy is selected for you.

Exemptions to this penalty include using your IRA funds for unreimbursed medical expenses exceeding 7.5% of adjusted gross income, purchasing your first home and qualifying higher education costs for yourself or family. Furthermore, using your account funds to purchase life insurance with guaranteed payouts that continue for the rest of your life can help avoid penalties altogether.

RMDs must begin on April 1 of the year following your 70 1/2 birthday; however, due to the SECURE Act’s modification, this deadline has been extended until age 72 for people born after 2023. Your financial advisor can assist in calculating an initial RMD based on both your account balance and expected lifespan.

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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