5 Things You Need to Know About IRA Early Withd...
5 Things You Need to Know About IRA Early Withdrawal
Traditional IRAs are one of the best ways to fund your retirement. For those that don’t know, an IRA is a retirement account that is funded by your income before taxes. Most of that money belongs to you for funding your retirement, provided you follow all the rules. But even if you have an IRA as your retirement fund, there’s still a lot you probably don’t know. Many who open an IRA account may eventually need to withdraw from it earlier than they planned and are surprised by the consequences. Whether you have an IRA or have been considering one, many are not aware of the rules associated with early withdrawals. With that said, here are 5 things you need to know about IRA early withdrawal.
IRA funds that are withdrawn during retirement are usually taxed as income. So, you only pay taxes on investment gains when you withdraw from your account during retirement. The advantage of this is that your earnings have a chance to grow more before they are taxed.
Will my contributions be tax-deductible?
One of the great things about IRAs are that contributions to your IRA are tax deductible. Provided you don’t have an employee retirement plan at your place of work, the entire amount of your contribution will be tax deductible.
What is a Roth IRA?
A Roth IRA is similar to a traditional IRA, but the difference is that you fund your Roth IRA after you pay taxes. The advantage of this over traditional IRAs is that you will not be taxed on your withdrawals during your retirement. On the downside, your contributions to your Roth IRA are not tax deductible.
What is considered early withdrawal?
Early withdrawals from an IRA are withdrawals before the age of retirement. According to the IRA, early withdrawals are made before the age of 59 ½ years. At the age of 60, you will no longer be subject to the penalties of early withdrawal.
What is the tax penalty for withdrawing early?
In addition to your withdrawal being taxed as income, you may also receive a tax penalty. This penalty is an extra 10% in taxes and there are very few exceptions for individuals under the age of 60. Therefore, it's best to avoid withdrawing early unless you have no other choice.
Are there any exceptions when it comes to penalties for early withdrawal?
Indeed, there are some exceptions when it comes to early withdrawal from an IRA. For one, if you are in danger of being evicted or you need to make immediate and necessary repairs on your home, you may be able to avoid penalty. Also, if you have lost a job that provided you with medical insurance, you may withdraw from your IRA to pay for your medical insurance premiums. In those circumstance, you will not be charged the 10% tax penalty. Other exceptions may be paying educational fees and funeral expenses.
How should I prepare for my withdrawal?
Never withdraw early from your IRA without some guidance. If you think you may need to withdraw money early from your IRA, tax to a tax expert about your situation. Also be sure that you have enough money available to you in the first place or you may need to sell investments as well to get the amount of money you require.
Is transferring my account considered early withdrawal?
The good news is that if you want to transfer your funds from one IRA account to another, this will not be considered early withdrawal. Because you will not being using the funds still, there is no penalty for removing the funds when you want to switch financial institutions.