The Potential Pitfalls of Early IRA Withdrawals

Anyone owning a Roth individual retirement account (IRA) must begin taking scheduled withdrawals at age 59 ½. It is important to take your required minimum distributions (RMDs) as planned to avoid penalties. One of the benefits of an IRA account is that your funds are not taxed until they are distributed, similar to an annuity.piggybank401k

Standard Early Withdrawal Penalty

Roth IRAs require account holders to take their first withdrawal at age 59 ½. If you take a withdrawal early, it is subject to a 10 percent penalty. That penalty is on top of any additional income taxes. The amount of income tax liability that you will have depends on income tax bracket.

Contributions made to your investment, and any gains it earns are also taxed as you make a withdrawal.

How to Avoid the Penalty

There are a few ways to avoid being penalized for withdrawing early from an IRA. If you have had to take a withdrawal for medical expenses that are not reimbursed, you may be able to avoid penalties.

Other situations include:

  • Military duty call
  • IRA owner’s passing
  • Permanent/total disability
  • Divorce proceeding judgment
  • Some educational expenses
  • Some first-time home purchases

It is important to review the requirements for each method of avoiding paying penalties for having to make an early withdrawal from your IRA.

Closing Thoughts

If you are not great with finances, it may be a good idea to appoint a financial power of attorney to handle your distributions, schedule timely withdrawals, and assist you in preparing your taxes. The power of attorney should be someone that can be trusted, and someone with a verifiable background in finance.

Image credit: Investment Zen

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