What Do I Need to Do to Withdraw Early From Rollover IRA?
A rollover IRA is an individual retirement account that you have transferred from another tax-advantaged account, such as a 401(k) plan. Like all IRAs, a rollover IRA is a long-term account meant to help you save for retirement. If you want to tap your IRA before you retire, you'll be up against the safeguards designed to keep your money in the account -- namely, taxes and penalties. However, the process is simple if that's your decision.
Fill Out Paperwork
The Internal Revenue Service wants to know whenever you take money out of a tax-advantaged account, including a rollover IRA. You'll have to get the correct paperwork from your financial services firm before you can proceed. Although all firms use slightly different forms, the process for filling them out is essentially the same. You'll need to provide information about yourself and your account, and you'll have to specify the amount you want to take out of your rollover IRA. One of the most important steps involves indicating the type of withdrawal you want to make. If you're taking money out of your rollover IRA early, you'll have to indicate that this is a premature withdrawal.
A rollover IRA allows you to defer the taxes on your investments, but you'll have to pay up when you take your money out. All rollover IRA distributions, whether you take them before or after you hit retirement age, are taxable as ordinary income. You'll pay the same tax rate on your withdrawals as you would on any other income you earn, such as your salary. The exception is if your rollover IRA is a Roth IRA. With a Roth IRA, you can take your contributions out tax-free at any time. On an early distribution, however, you'll have to pay tax on the earnings that come out of the account.
Unless you've got a valid, IRS-approved reason, taking money out of your rollover IRA will trigger a 10 percent penalty. This is on top of the taxes you're hit with. To avoid the additional damage, you'll have to be older than 59 1/2 when you make your withdrawal. Unfortunately, early IRA withdrawals don't typically qualify. If you can demonstrate that you need the money for certain expenses, the IRS will waive the fee. Common examples are first-time home costs, beneficiary payments, higher education fees and medical expenses greater than 7.5 percent of your income. You also can sidestep the penalty if you're a qualified reservist or if you become totally disabled.
Generally, your rollover IRA should be among the last places you look for pre-retirement money. If you just need a short-term fix, take money out of your IRA but replace it within 60 days. While you can't technically borrow from your IRA, the IRS does allow you to roll money over once per year from an IRA. As long as you return the money within 60 days, you have effectively rolled the money back to your original account, avoiding all taxes and fees. Since you can only do this once per year, this option won't apply if you recently rolled the money into your IRA.
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.