You may take money out of an IRA for any reason, including a financial hardship, but if you are under age 59 1/2, the Internal Revenue Service considers the withdrawal nonqualified. Unless your financial hardship meets one of the exceptions specifically defined by the IRS, you must pay an early withdrawal income tax penalty in addition to the income taxes you would normally owe on the distribution. Examples of recognized hardships include a permanent disability, post-secondary education costs and up to $10,000 to put toward purchasing a first home. Simply losing your job does not entitle you to a waiver of the early withdrawal penalty.
Complete the required forms from your financial institution to take money out of your IRA. You need not specify why you are taking the withdrawal to receive the funds.
Record and document your expenses if you plan to claim an exception to the early withdrawal penalty. For example, if you use the money for your child's college tuition, keep receipts from the school showing the amount of tuition paid.
Complete Form 8606 if you took your early distribution from a Roth IRA. When you take an early distribution from a Roth IRA, you can take out all the contributions tax-free first. Then, if you need more, you can take out the earnings, but the earnings are taxable and subject to the early withdrawal penalty. If you take money from your traditional IRA, the distribution is taxable if your contributions were deducted from your income taxes.
Complete Form 5329 if any of your withdrawal is taxable. This form calculates your early withdrawal tax penalty or reports your exception to the early withdrawal penalty. If you only withdrew contributions from your Roth IRA, do not complete Form 5329, because none of your distribution is taxable.
Complete your income taxes with Form 1040. On line 15a, report the nontaxable portion, if any, of your distribution. On line 15b, report the taxable portion, if any. Next, if you owe an early withdrawal penalty, enter it on line 58. Finally, on line 61, report any federal income taxes withheld from your IRA withdrawal.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."