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IRA Early Withdrawal

Have hard times in the economy made you think about making an IRA early withdrawal? In this shaky financial era, it’s hard to ignore large and growing amount of money sitting untouched in your account. No one can make you leave your money in your IRA, but there are a few issues you should consider before making a final decision. How will your early withdrawal affect your financial future? What kind of penalties will you have to pay? Are there any options to undermining your retirement in this way?

The first thing to consider when contemplating an IRA early withdrawal is how it might affect your plans when it comes to retirement savings. One of the most touted benefits of a traditional IRA is that both the principal and the earnings remain in the account without taxes, building interest at an ever increasing, exponential rate. Removing money from the account stops this positive cycle and sets you back at square one. The small amount of money you remove today can cost you security throughout decades of retirement. For this reason, taking money from your retirement account should always be the very last resort.

Have you considered how much of your money will go toward penalties and taxes? Just as the IRS offers incentives and tax breaks to encourage people like you to invest in a retirement account, they discourage IRA early withdrawal with hefty penalties and a disproportionate tax bill. Taking money out of a retirement account before the age of 59 and one half years of age usually will force you to pay ten percent of your money in early withdrawal and another ten percent in taxes. That makes a total of one fifth of both your principal and your earnings. In addition, you would have to count the money you withdraw as earnings and pay income tax on them. Altogether, you may be giving away up to one half of the account if you choose to make an IRA early withdrawal.

You might avoid paying the penalties for an IRA early withdrawal if you can prove you are having one of a short list of financial hardships, which include death, high medical bills, disability, college tuition, or buying a home. However, because most IRA accounts are relatively high earning, most people would be better off leaving the money in the account and taking a traditional loan.

Taking money from your individual retirement account probably doesn’t seem like such a good idea anymore, but are there any options? Even a traditional loan may cost you less money than you would be losing. If you are having a hard time making ends meet now, consider how much harder this will be when you are elderly and unable to work. Robbing the future to pay for the past is rarely a good idea.

Because the penalties and taxes involved in taking an early withdrawal from your IRA are substantial, you should seriously consider any alternatives available. With knowledge of your many options, you can make an educated and informed choice that will best benefit you both in the present and the future.

IRA Early Withdrawal
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