An Individual Retirement Account is a type of pension that you can set up yourself as an individual investor. The IRA is intended for long-term retirement savings and can provide various tax advantages, such as tax-deferred growth of earnings and contributions and the tax-detectability of contributions. In order to encourage long-term savings, the Internal Revenue Service imposes penalties if you withdraw funds from your IRA before retirement age.
Early Withdrawal
For IRS purposes, any withdrawal you take from an IRA before the age of 59 1/2 is considered an early withdrawal. This restriction applies to all IRAs, including Roth IRAs.
Taxes and Penalties
Distributions from all IRAs except Roth IRAs are fully taxable at ordinary income tax rates, regardless of when you take them. Roth IRA distributions are generally tax-exempt, unless you withdraw funds within 5 years of the establishment of the account. In addition to these tax consequences, withdrawals before the age of 59 1/2 are subject to a 10 percent IRS penalty.
Exceptions
A number of exceptions to the 10 percent early withdrawal penalty are permitted by the IRS, including distributions due to disability, excess medical expenses or higher education expenses. Other qualifying distributions are outlined in IRS Publication 590 and include those used to satisfy an IRS levy, qualified reservist distributions, distributions in the form of an annuity and those used for the first-time purchase of a home or as the beneficiary of an inherited IRA.
Loans
Unlike 401k plans or other employer-sponsored pension plans, you cannot take a loan against an IRA. However, if you have short-term borrowing needs you can take a tax- and penalty-free distribution from your IRA once per year for up to 60 days, regardless of your age. If you fail to return the funds within the 60-day window, you will be subject to tax and possible early withdrawal penalties.
Rollovers
The IRS permits rollovers from your IRA account to almost any other type of qualified retirement plan, subject to the approval of the receiving plan administrator. Rollovers are tax- and penalty-free transfers from one tax-advantaged account to another, such as from an IRA to a 401k plan. While most retirement plans share the tax and penalty characteristics of an IRA, some qualified plans allow loans, which would permit you to access your retirement funds without paying an early distribution penalty.
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