- Can I Take Money Out of My Non-Qualified Plan?
- Taxes and Penalties for Closing an IRA Account
- Tax Laws on IRA Withdrawals
- What Is the Difference Between Qualified & Non-Qualified Annuities?
- Penalties for Roth IRA Early Withdrawal
- When Can I Take Distributions From an IRA Without Incurring a Penalty?
An IRA is a way to save for retirement while deferring taxes on the earnings, or to plan for tax-free withdrawals in retirement. Because of these tax advantages, the IRS imposes penalties for "non-qualified" withdrawals from the individual retirement account. The usual penalty for a non-qualified withdrawal is 10 percent of the amount you withdraw. What constitutes a non-qualified withdrawal depends on whether the individual retirement account is a traditional IRA, a Roth IRA, or a self-employed IRA.
Traditional IRA Penalties
If your IRA is funded by before-tax money, meaning that you claimed a deduction from your income for your contributions, any amount you withdraw before you reach age 59 1/2 is a non-qualified withdrawal, and it's subject to penalties. If you made non-deductible traditional IRA contributions, any amount that you withdraw that is not attributable to the non-deductible contribution -- such as the earnings -- is a non-qualified withdrawal.
You fund a Roth IRA with after-tax money, meaning that you take no tax deduction for your Roth contributions. Subsequently, you can withdraw from your Roth contributions tax-free and penalty-free at any time. If you withdraw Roth earnings when you are 59 1/2 or older, and if the account has been open for at least five years, it is a qualified withdrawal, and you owe no taxes or penalties on this money. If you are younger than 59 1/2, any withdrawal of Roth IRA earnings is non-qualfiied.
SIMPLE IRA Penalties
A SIMPLE IRA, which is a type of self-employed pension fund, has some special penalty requirements for non-qualified, early withdrawals. If you take a non-qualified early withdrawal within two years after you started participating in the plan, you will pay a penalty of 25 percent of the amount you withdraw. After the two-year period, the penalty drops to the usual 10 percent.
The IRS allows you to take penalty-withdrawals from your IRA in certain cases. If you are buying a first-time home, you can withdraw up to $10,000 from your account without penalty. Your spouse can also withdraw up to $10,000. If you are paying college tuition for yourself, your spouse, children or grandchildren, you can withdraw penalty-free as well. You can also withdraw without penalties if you are disabled, or to pay health plan premiums if you are unemployed. In addition, withdrawals made by the account beneficiary after you die are penalty-free.
Non-qualified IRA withdrawals are taxable are also taxable. The non-qualifying amount you withdraw must be added to your taxable income, and taxes calculated on that amount. You pay these taxes when you file your yearly income tax return.