Individual retirement accounts (IRAs) are designed as long-term investment vehicles to benefit the investor in his retirement years. Because of this, withdrawals before the accounts maturity date is strongly discouraged, and different penalty measures have been implemented to dissuade investors from taking out their funds prematurely. This is done in the form of taxation, and there are only a few exceptions under which you can avoid paying these penalties.
10 Percent Early Withdrawal Fee
Any withdrawal that is not a qualifying distribution is subject to a 10 percent early withdrawal penalty fee. A qualifying distribution is one taken after you are 59 1/2 years old or permanently disabled. These withdrawals can be tax-free if they are taken from a Roth IRA, but they come too late in life for some investors, who need access to their funds much earlier. Since an IRA's average return on its investments each year is 8 percent, a 10 percent penalty fee is quite stiff.
Income Tax
Some IRAs offer tax-free withdrawals, such as the Roth IRA. But if you make a withdrawal of funds from an IRA that is less than 5 years old, you will have to pay the 10 percent penalty tax as well as regular income tax, if applicable. On traditional IRAs, you will have to pay this no matter when you make the withdrawal of funds. In an IRA offering tax-free earnings, this type of early withdrawal can deduct as much as 1/3 of the IRA's total funds before you even get access to them.
Penalty Exclusions
There are a few circumstances where the penalties can be evaded. These are called exceptions, and you can claim one if you are withdrawing IRA funds to pay for education expenses, make a down payment on your first home or put toward high medical costs. You can also withdraw the contributions made to your IRA at any time without penalty--just not earnings from those contributions.
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