You can pull your money out of a traditional or Roth IRA at any time. However, Internal Revenue Service regulations prescribe penalties for early withdrawals. The penalties on early withdrawal are different depending on which type of IRA you are removing the funds from.
Traditional IRA Distribution Penalty Rules
Once you are 59 1/2 years old, the IRS doesn't impose penalties for distributions from traditional IRAs. Until that time, you normally pay a 10 percent penalty to the IRS in addition to regular income taxes on withdrawn funds. The penalty tax doesn't apply to contributions you made for which you did not get a tax deduction, and it doesn't apply to withdrawals from an IRA account that you inherited. You can get an IRS waiver to the penalty in some situations. For example, there's no penalty if you take money out early because you become disabled or use the cash to pay qualified higher education expenses or an IRS levy.
Special Penalty Situations
Rollovers. There normally is no tax liability when you take money out of an IRA and transfer it to another retirement account. However, you do have to pay income taxes on rollovers from traditional to Roth IRAs
SIMPLE IRAs. Savings Incentive Match Plans for Employees are employer-provided IRAs. The distribution rules are the same as for traditional IRAs with one exception. If you make an early distribution or rollover from a SIMPLE IRA during the first two years you participate in a SIMPLE plan, the penalty tax rate is 25 percent instead of 10 percent.
Roth IRA Qualified Distributions
When you remove money from a Roth IRA, the withdrawal may be qualified or unqualified. Qualified distributions are exempt from all penalties and taxes. A Roth IRA must be in existence for five calendar years before distributions can be qualified. In addition, one of the following conditions must apply:
- You are 59 1/2 years old
- You are permanently and completely disabled
- You receive the IRA as an inheritance
- The withdrawn funds, up to $10,000, are for renovating or buying your first home
Unqualified Roth Distributions
When a Roth distribution is unqualified, the money is generally subject to the same tax and penalty rules that apply to traditional IRAs. However, some funds in a Roth aren't taxable or subject to the penalty because they are after-tax money. The status of an unqualified withdrawal depends on how the IRS classifies the money:
- Contributions. You can take out money you contributed to a Roth IRA anytime with no penalty or tax liability. The IRS counts withdrawn money as contributions up to the amount you've put in since opening the account.
- Rollovers. Rollover money is withdrawn after contributions and is not subject to income taxes. The 10 percent penalty applies if the rollover was carried out within the last five years and you aren't yet 59 1/2 years old.
- Earnings. Money remaining in a Roth once contributions and rollover funds are withdrawn counts as earnings. An unqualified distribution of earnings is subject to regular income taxes and the 10 percent penalty tax.
- H & R Block: Early Withdrawal Penalties – Traditional and Roth IRAs
- IRS: Publication 590 (2013), Individual Retirement Arrangements
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Topic No. 557 Additional Tax on Early Distributions from Traditional and Roth IRAs." Accessed June 19, 2020.
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed June 19, 2020.
- Internal Revenue Service. "Traditional IRAs." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed June 19, 2020.
- Internal Revenue Service. "Roth IRAs." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Designated Roth Accounts - Distributions." Accessed Mar. 20, 2020.
- Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions." Accessed June 19, 2020.
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.