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Can IRAs Be Used Before Retirement?

Anyone who has contributed to an Individual Retirement Plan (IRA) is likely aware of the plan’s primary restriction, namely that you cannot withdraw the money until you reach the age of 59½.  At the same time, the government didn’t want this restriction to be too onerous, so rather than making it impossible, they simply decreed that if you do so you will incur – on top of the taxes owed on the earnings that have accumulated – a penalty of an additional 10%.  This was considered to be sufficient to discourage most taxpayers from arbitrarily raiding their retirement savings prematurely, while allowing it to be used as a safety net for those undergoing financial stress when younger.

As with most government legislation, special interests (as well as taxpayers themselves) lobbied for various exceptions to the early withdrawal penalty.  The result was a number of situations in which the 10% levy on earnings for premature withdrawals would be eliminated. (Keep in mind that the tax on the earnings will still be owed).  You might be surprised at the number of penalty exceptions allowed:

  • After the death of the owner (heirs can withdraw all of an inherited IRA without penalty).
  • After the owner becomes disabled.
  • For qualified higher education expenses.
  • For purchasing a first-time home (up to $10,000).
  • For health insurance premiums paid while unemployed.
  • For unreimbursed medical expenses exceeding 7.5% of AGI.
  • For certain distributions to qualified military reservists called to active duty.
  • For excess IRA contributions withdrawn by the extended due date of the return (typically October of the following year). Note that the penalty will still apply to the earnings from those contributions.
  • For a Roth conversion.
  • For rollovers or eligible distributions to another retirement plan or IRA directly (i.e. trustee-to-trustee by check or electronically) or within 60 days otherwise. Such rollovers will not incur any taxes at all.

As you can see, there are a lot of ways you can access the money in your IRA before you turn 59½ without incurring a penalty.  And if you really fall on hard times, there’s one more exception that’s pretty much a catch-all for anyone needing to access the funds in his or her IRA early. It’s called a 72t distribution (named after the internal revenue code section in which it’s found). It allows you to liquidate the IRA using an annual series of “substantially equal” payments until you reach age 59½ or over five years, whichever is longer.

Despite the fact that you’re allowed to prematurely tap into your IRA under all these circumstances, please don’t lose sight of the fact that its main purpose is to help you save for your retirement. If you take money out too soon, not only have you reduced the amount saved, you also lose the growth of those invested savings over the remaining years before you actually retire.  Despite the flexibility the government allows, it’s best to limit any needed withdrawals before you actually retire to true financial emergencies.



One Comment for this Post
  • Alan Silverstein
    April 1, 2018 at 6:09 pm

    Nice summary. I would add two more points:

    1. The problem with taking money out of any tax-deferred or tax-free retirement vehicle prematurely is that there’s a limit on how much and how often you can put money back in! Earned income within various limits, and Roth conversions into rIRAs (paying income taxes).

    2. It recently came to my attention that the early-withdrawal penalty exceptions for 401k’s and similar accounts are DIFFERENT than for tIRAs. In particular, 401k’s have a hardship exception. I didn’t know that. If you care, it’s worth researching the rules for YOUR type of container.



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