Early Ira Distributions

Early IRA distributions are not advised. Why you might ask? Individual Retirement Accounts (IRAs) were created to become a retirement plan for workers who either did not have a 401k plan or wanted to provide for their own future beginning at an early age.

Per IRS regulations, contributions into Traditional IRAs are supposed to grow until we retire. The scheduled age for a penalty free distribution is 59-1/2. Would you take a distribution and hand someone else over a third of what you withdrew? No, I didn't think so.

If a distribution is made before you become 59-1/2, there is an automatic 10% penalty on top of the taxes due on the extra income. Depending on your income, the distribution could easily be lowered by 35 percent. After you're past the 59-1/2 age requirement, distributions are allowed and taxed at your normal income rate. Since Traditional IRAs are set up on before tax funds, there is no way to get around paying tax on the distribution.

Roth IRAs were developed in 1997 to be another source for a retirement plan. However Roth IRAs are funded with after tax dollars. This means that when there is a distribution per IRS guidelines, it is normally a non-taxable event.

Per IRS regulations, funds contributed into a Roth IRA must remain there for 5 years in order to remain tax free. If you take a distribution before the 5 year timeline, there is no 10% penalty as with a Traditional IRA. However, you will have to pay taxes at your current rate on the amount of the distribution.

If you wait until the 5 years has passed, you will not have a 10% penalty. You also will not be required to pay taxes on the withdrawal. With Roth IRAs there is no 59-1/2 age limit, just the 5 year from date of contribution rule.

Why would you choose to decrease your withdrawal? If you're wise, you won't. Leave your funds in your IRA so they will be there once you retire and have less income to depend on. As with any important financial decision, it is prudent to discuss the implications of any withdrawal with your Financial Consultant or a Financial Planner first. That way you can make sure you're not making an expensive decision.