The Internal Revenue Service wants you to keep money in your individual retirement account until you retire, so it imposes penalties if you take money out early. These penalties vary according to the type of IRA. But in general, you must wait until age 59 1/2 to take out money without penalty.
Any withdrawal from a traditional IRA will be subject to tax as ordinary income at your regular tax rate. Any money you take out before 59 1/2 also will have a penalty of 10 percent of the amount taken out. An exception is if you inherited an IRA. In that case, the withdrawal is taxable, but there won't be a penalty.
A Roth IRA is similar to a traditional IRA in that you will be assessed a 10 percent penalty if you make a withdrawal before age 59 1/2. There is no income tax assessed on funds you contributed to a Roth IRA, if it has been established for at least five years. Both income tax and the penalty will be assessed for money taken out in less than five years. Withdrawals from a traditional IRA for rollovers into a Roth are not taxed.
SIMPLE and SEP
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, contains contributions from both an employee and an employer. A SIMPLE IRA and a Simplified Employee Pension (SEP) IRA, which is funded totally by an employer, fall under the same basic withdrawal penalties, with one important exception: a withdrawal from a SIMPLE is penalized 25 percent if the account is less than two years old.
All IRAs allow withdrawal exceptions for demonstrated hardships. These include disability, some home purchases, medical expenses that exceed 7.5 percent of gross income, health insurance premiums for some unemployed individuals, certain educational expenses and any IRS tax levy. Home exceptions are limited to first-time home buyers and $10,000 in withdrawals.
Another way to withdraw traditional IRA funds without penalty is to set up "substantially equal periodic payments." This distributes IRA funds on a regular basis. Withdrawals are taxed as regular income, but there is no penalty. These are based on the amount in the IRA and your life expectancy and must continue for at least five years or until you are 59 1/2, whichever is longer.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.