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An IRA, or individual retirement account, is a tax-deferred investment vehicle used to save for retirement. You can choose to cash in your IRA in whole or in part by taking a distribution from the account. Depending on your age, however, you may be responsible for additional taxes, penalties and fees.
You can cash in your IRA without penalty once you reach age 59 ½. If you do not begin taking distributions from your traditional IRA after age 59 ½, the Internal Revenue Service mandates that you begin withdrawals by April of the year following the year you reach age 70 ½. You cannot borrow against your IRA like you can with a 401k. But you can take a penalty-free withdrawal under certain circumstances. You may qualify for a hardship withdrawal if you have an immediate financial need for situations such as money to prevent eviction, pay funeral expenses, pay tuition or purchase a principal residence.
Retirement account distributions are taxable during the year payments are received. You must report all IRA distributions on your income taxes and pay taxes based on your current income tax bracket. You must include all money received from your IRA in your gross income with some exceptions. If you roll over or transfer IRA distributions into another retirement account or make a qualified charitable distribution, you do not have to pay taxes or add these amounts to your gross income.
If you cash in some or all of your IRA before age 59 ½ the IRS will assess a 10 percent tax penalty to the distribution. This tax penalty is in addition to the income taxes you must pay by taking an IRA distribution. For example, if you are in a 25 percent tax bracket at the time you withdraw money from your IRA and you are less than age 59 ½ at the time of distribution, you must pay 35 percent in taxes on the amount withdrawn. Further, cashing in your IRA early means you lose the tax-deferred growth of your investments and you will have little or no retirement savings available once you reach retirement age.
You may contribute a specified amount to your IRA annually depending on your age. Individuals below age 50 can contribute $5,000 to an IRA as of 2010. Individuals older than age 50 qualify for catch up contributions in the amount of $6,000 as of 2010. You can take a tax free distribution from your IRA in the amount of your current year's contribution. However, you must withdraw it before you file your tax return. Also, you cannot take a tax deduction for the contribution if you withdraw it prior to filing your income tax return.
Distribution requirements are slightly different for Roth IRAs than for traditional IRAs. Unlike a traditional IRA, which requires that you take withdrawals no later than age 70 1/2, you may contribute to the Roth IRA and leave funds in the account as long as you live. According to the IRS, you can take a tax and penalty free distribution from a Roth IRA if your account has been in place for at least five years and the payment is made after you turn 59 1/2; made because you are disabled; made to a beneficiary upon your death; or used to buy a first home.
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