How to Cash Out an IRA Without Tax Penalties

by D. Laverne O'Neal

An individual retirement arrangement is a retirement savings vehicle. A traditional IRA is typically funded with deductible contributions; most early withdrawals are subject to a penalty tax. After age 70 1/2, the account owner must begin receiving mandatory minimum distributions. Any traditional IRA distribution is subject to ordinary income tax. Distributions of Roth IRA contributions are not taxed, but earnings withdrawn before retirement age may be subject to penalty.

1. Withdraw no funds earlier than age 59 1/2. Withdrawals taken from a traditional IRA after you reach 59 1/2 are taxable but free of penalty. Distributions made sooner -- with few exceptions -- are subject to a 10 percent penalty tax.

A first home can help you sidestep withdrawal penalties.

2. Take required minimum distributions. After age 70 1/2, the Internal Revenue Service requires that you begin taking what are termed required minimum distributions (RMDs) each year. You must take your first distribution by April 1 of the year following the year you turn 70 1/2. If you do not take out the RMD in its entirety by Dec. 31 each year, you will be slapped with a 50 percent penalty tax on the amount not withdrawn. For example, your RMD for year 2013 is $3,500. Due to error or oversight, you withdraw only $3,000. The IRS will charge a penalty of $250 -- 50 percent of the $500 that was not distributed. You calculate your RMD using IRS life-expectancy table figures that correspond to your age and tax-filing status. Use the Uniform Lifetime Table if you are single or your spouse is younger than you by 10 years or less. The same table applies if your spouse is not your sole IRA beneficiary. Use the Joint and Last Survivor Table if your spouse is more than 10 years your junior. IRA beneficiaries consult the Single Life Expectancy Table. These tables are all available at the IRS website. If your failure to take the RMD was due to error, you can write to the IRS at the address to which you send your return to request a waiver of the penalty.

The five-year-rule clock starts Jan. 1 of the year you open your first Roth IRA.

3. Buy a first home. You may withdraw up to $10,000 from a traditional IRA in your lifetime to fund the purchase of a first home that serves as a primary residence. If neither you nor your spouse has owned a home in two years, the IRS considers you a first-time home buyer. The IRA funds may go toward not only purchase expense but also closing costs and fees. You may purchase the home for yourself, your spouse, your children, grandchildren, parents or other ancestor. Take care over the timing of your withdrawal; the IRA funds must be used toward the new home within 120 days of the distribution.

4. Own any Roth IRA for at least five years by the time you reach age of 59 1/2. Contributions to a Roth may be withdrawn tax-free and penalty-free at any time. Earnings on those contributions may be withdrawn without penalty after age 59 1/2 as long as you have owned a Roth IRA for at least five years. For example, you open your first Roth on Jan. 1, 2010. You subsequently open additional Roth accounts in June 2012 and October 2013. During 2014, you turn 59 1/2. You are eligible to take penalty-free earnings distributions from any of your three accounts as of Jan. 1, 2015.


  • There is no RMD for a Roth IRA, and you may continue contributing to a Roth for as long as you live.

About the Author

D. Laverne O'Neal, an Ivy League graduate, published her first article in 1997. A former theater, dance and music critic for such publications as the "Oakland Tribune" and Gannett Newspapers, she started her Web-writing career during the dot-com heyday. O'Neal also translates and edits French and Spanish. Her strongest interests are the performing arts, design, food, health, personal finance and personal growth.

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