What is the penalty for taking money out of an IRA account before you are 65?
Thank you!
10% penalty, on top of the income tax. And it is 59.5, not 65.
Depends on the type of IRA. If it’s a Roth IRA it’s already taxed so you can take the entire principal out without penalty.
No. The 10% penalty for early withdrawals still applies to Roth IRAs.
Keep in mind your taxes at the end of the year. Typically 20% is withheld from your IRA withdrawal for federal income taxes, none for local or state taxes. And depending upon the amount of you withdraw, you may also end up in a much higher tax bracket at the year end.
If you earn $50,000 per year and take $50,000 out you will be in the $100,000 income tax bracket when you file. Your payroll has had taxes withheld at the 50k rate, not the 100k rate and the 20% withheld from the IRA withdraw isn’t enough to cover that part either.
So you have the 10% penalty, and a whopper of a tax bill at the end of the year that you probably aren’t prepared for. Part to cover the shortfall in your Federal withholding rate and part to pay state and local taxes.
I did this very thing many years ago and tax time was quite an unpleasant surprize.
There are some ways to take the money out without a penalty. I think first-time home purchases, and there is some consideration given to desperation. I don’t want to make an accurate list. The important thing is that there are legal ways to get the money and dodge the penalty.
Once you receive it, if it was never taxed (say it was taken from gross income pre-tax), then it gets added to your annual income and, as noted, could hurt.
Maybe you can get your hands on 100k, and duck the penalty, but kiss 30k away on taxes. You got 70k now, and if you desperately need it, and can justify it… then consider it.
No, Not on the principal, just the earnings.
I see that you did specify principal in the first post, which I read as referring to the entire balance in the account, rather than specifically referring to the contributions. So, yes, the contributions themselves are not taxed or penalized, only the earnings.
Of course, this also assumes the 5-year period for any traditional IRA rollovers has passed.
I tend to tell people to assume that all the money coming out of a Roth can be penalized until they check with their accountant.
Good point and advice. I should have linked my response first.