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2021-11-29

What Happens If I Withdraw IRA Contributions Early?

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There may come a time when you want to withdraw money from your individual retirement account (IRA). Perhaps you wish to use it to pay for college expenses for yourself or your children. Maybe you recently had a baby and could use some extra income. Or maybe you find yourself with medical expenses that your health insurance will not reimburse. 

While these are all valid reasons to dip into your retirement savings, it’s important to be aware of the IRA withdrawal rules first. There could be potential penalties for early withdrawals. Here at Phelps LaClair, we want to ensure our clients are well-versed in these rules—let’s take a look at them now. 

Can I pull money out of an IRA early? 

Yes, you can withdraw money from your IRA prior to retirement. However, depending on your age, the type of IRA—traditional or Roth—and the reason why you are withdrawing funds, there could be a financial penalty. 

With a traditional IRA, once you place money into the account, you cannot remove it until you reach a certain age without incurring fees. Early withdrawals will incur taxes as well as a 10% penalty from the Internal Revenue Service (IRS). 

  • Starting at age 59 1/2, you can withdraw funds from a traditional IRA without any penalties or restrictions. However, you may owe taxes on the money you contributed to the traditional IRA, depending on your situation. 
  • At age 72, you must begin taking the Required Minimum Distributions (RMDs) from your traditional IRA every year. If you don’t, you may face penalties. 

A Roth IRA is a bit less strict—you can withdraw your contributions without penalty at any age, at any time, and for any reason. However, you cannot withdraw your earnings (interest accumulated from your contributions) without paying taxes

There could be a Roth IRA early withdrawal penalty if you withdraw earnings:

  • Before the IRA withdrawal age of 59 1/2
  • If it’s been less than five years since you started contributing to your Roth IRA

Additionally, the IRS places a 10% penalty for Roth IRA early earnings withdrawals. 

How can I avoid an IRA early withdrawal penalty? 

According to IRA withdrawal rules, there are a few reasons you can remove money early from either a traditional or Roth IRA without facing the IRS 10% penalty. They are: 

  • Paying for a Qualified Higher Education Expense (QHEE) for yourself or an immediate family member 
  • Purchasing a home for the first time
  • Paying for birth and/or adoption expenses
  • Helping to pay major medical expenses not reimbursed by health insurance
  • Financing health insurance premiums when unemployed for at least 12 weeks
  • Supporting those with a physical or mental disability where they can no longer work
  • Helping military members in active duty for at least 180 days

Do you have questions about the IRA withdrawal rules?

If you need to pull funds from your IRA, and you’re worried about taking on an early withdrawal penalty, Phelps LaClair can help. We will guide you through the process by comparing your options and helping you choose the best course of action. Managing an IRA can be tricky, and we want to ensure you get the best outcome for yourself and your family. Contact us today at 480-892-2488 to schedule a consultation. 

Photo by Mikhail Nilov from Pexels

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