IRA Early Withdrawal

Times are tough. There is no doubt about it, and no one needs to remind anyone of how difficult things can be out there.  Many people have been contributing to their IRAs for years and dream of that day when they can retire. However, plans can change and you might need that money right then.  If you need to take money out of your IRA before the age of 59 ½, then you will be subject to a 10% early withdrawal penalty as well as you will owe the IRS any tax that might be due on the money.

That’s the bad news.  However, there are two instances that allow you to withdraw money from your IRA without any penalties.  If you are using the funds for education, there is no penalty. You can use the money on the education costs for yourself, your children, or your grandchildren. 

There is also the home exemption.  If you are purchasing a home, the IRS will allow you to bend the rules a bit when it comes to using funds in your IRA.  You can use $10,000 of your IRA money towards the purchase of your first home without worrying about penalties. If you are married, your spouse can do the same thing. This will give you $20,000 to use towards your home that won’t be taxed or penalized.  The other cool thing about this is that you don’t have to technically be a first time home buyer. To qualify as a first time homebuyer, you or your spouse can not have owned a principal residency for the past two years. 

Things are a bit different for the Roth IRA. If you take $10,000 out of your Roth for your home, this will be considered a qualified withdrawal if you have had your Roth for five years. Since the money was put in the Roth tax free to begin with, you will not get a bill from the IRS when you take it out for your home purchase.