Unlike employer-sponsored plans, such as 401(k)s or 403(b)s, you are permitted to cash out your individual retirement account whenever you want. However, if you cash out before you turn 59 1/2, you will owe income tax on the money withdrawn and a penalty for taking an early withdrawal. The implications of an early withdrawal depend on whether you have a traditional or Roth IRA.
Withdrawal Request Forms
To cash out your IRA, you need to submit a distribution request form to the financial institution that holds your account. The forms differ slightly from bank to bank, but you generally need to include your name, identification information, account information, the amount you want to withdraw and how you want the money paid to you, such as a direct deposit into an account or a check for you to cash. You also have the option to have the bank withhold money for federal and state income taxes. If you anticipate owing takes, this can help you avoid under-withholding penalties.
Traditional IRA Tax Impact
Distributions from traditional IRAs count as taxable income no matter when you take the money out. However, when you're under age 59 1/2, you also get hit with a 10 percent early withdrawal penalty unless you qualify for an exception. For example, if you cash out $20,000 from your traditional IRA and you fall in the 25 percent tax bracket, you'll owe $5,000 in income taxes and $2,000 in penalties.
Roth IRA Tax Impact
Roth IRAs can be a bit more forgiving when it comes to early withdrawals, which for Roth IRAs also require that the account be open at least five years in addition to you being at least 59 1/2. Money contributed to Roth IRAs has already had taxes taken out of it, so the IRS permits you to take out that money without paying any taxes or penalties. But, if you withdraw earnings from the account, you pay taxes and early withdrawal penalties. For example, say your Roth IRA holds $15,000 of contributions and $5,000 of earnings. If you cash it all out, only the $5,000 of earnings counts as taxable income and is hit with the 10 percent penalty.
In limited circumstances, you can avoid the penalty, but not the taxes, on early withdrawals. Circumstances in which the penalty is waived include if you're permanently disabled or are cashing out an IRA you inherited from someone else. You can also take out enough money to cover medical insurance while you're unemployed, medical expenses exceeding 10 percent of your adjusted gross income for the year or higher education expenses. Finally, you can take out up to $10,000 for buying a first home.