To discourage you from raiding your individual retirement account early, the Internal Revenue Service doesn't prohibit all withdrawals before a certain age. Instead, the IRS simply tacks on a 10 percent penalty to the taxable portion of non-qualified withdrawals from IRAs. But, even if you're not able to take a qualified withdrawal, you might still avoid the penalty.
If you've used a traditional IRA for your retirement savings, you can take distributions from your IRA as soon as you celebrate your 59 1/2 birthday. At that point, your withdrawals are "qualified distributions." However, you still owe income taxes on the withdrawals because you got a tax deduction for your contributions.
Roth IRAs have trickier criteria for qualified withdrawals. One, the Roth must be at least five years old, counting from the first day of the first tax year you made a contribution, if you want to withdraw the earnings on your contributions without penalty. For example, if your first contribution took place in the 2013 tax year, it counts from Jan. 1, 2013. Two, you must be either 59 1/2, permanently disabled or taking out up to $10,000 for a first home. Since Roth IRA contributions are nondeductible, qualified distributions come out tax-free and penalty-free. In addition, you can take out your contributions whenever you want without paying a penalty because the penalty only applies to taxable withdrawals.
If you are taking an early withdrawal, the IRS has several exceptions that could help you avoid the penalty. Some exceptions, such as if you're permanently disabled or taking a qualified reservist distribution, let you take out an unlimited amount penalty-free. Others, like the penalty exceptions for higher education costs, medical premiums when unemployed and significant medical expenses, only allow you to take out enough to cover the costs. Anything in excess of the costs are still hit with the penalty.
If you inherit an IRA, you can take distributions from the IRA as a beneficiary any time without incurring a penalty. It doesn't matter how old the decedent was or how old you are. However, if you inherit an IRA from your spouse, you may have the option of treating the IRA as your own. As soon as you make this election, you aren't considered a beneficiary anymore so the exception doesn't apply. It's as if the IRA has always been yours, so you need to meet the requirements for a qualified distribution or a penalty exception on your own to get out of the penalty.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."