Individual retirement accounts (IRAs) are designed as a long-term investment that can provide income throughout your retirement years. Regardless of whether you are just starting to invest or nearing retirement, having an IRA is highly recommended by numerous financial advisers. The drawback is that these investment vehicles are difficult to draw money out before reaching maturity. Early withdrawals are often accompanied by a penalty fee, with a few exceptions.
Taxes on Withdrawals
How the money in your IRA is taxed depends on the type of IRA you have. Traditional IRAs allow you to use tax-free money to fund the account, but the withdrawals are taxed. A Roth IRA taxes the money contributed to the fund but allows the capital gains to be withdrawn tax-free. This saves you a lot of money in the long run but only if you keep the money in the account until you are 59 1/2 years old. If you withdraw earlier, you will have to pay taxes on the earnings.
Early Withdrawals
Any withdrawals prior to when the IRA reaches maturity (age 59 1/2) are subject to a 10 percent penalty fee. In addition, you will also have to pay taxes on the earnings in a Roth IRA. But you can withdraw the contributions made to your IRA without being subjected to the 10 percent penalty fee. Once you reach 59 1/2 years old, you can withdraw as much as you want whenever you want without any penalties or taxes.
Penalty Exceptions
There are a number of ways you can withdraw from an IRA without being subject to a penalty. Withdrawals make to fund education, such as college tuition, are exempt, as is a one-time withdrawal of up to $10,000 to put toward a down payment on a home, if you qualify as a first-time home buyer. You can also make withdrawals to pay for medical expenses in excess of 10 percent of your annual income, and you can withdraw funds in the event of the IRA owner's disability or death.
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