No matter what type of IRA you have, you'll lose some money when you cash it in. During your retirement years, these are planned losses, but if you're pre-retirement, you could stand to lose a lot more. Consider how much you will lose when you cash in an IRA to determine whether or not it's worth it - it rarely is.
The 10 Percent Penalty
If you are younger than 59 1/2, you may incur a 10 percent penalty if you choose to cash out your IRA. This 10 percent is calculated on the full amount that you receive, including your principal investments and any gains you've had in the market. Certain types of withdrawals, though, are penalty free. These include: paying for medical insurance after a job loss, incurring medical expenses that exceed 7.5 percent of your adjusted gross income, a down payment on a first home (up to $10,000), paying certain college costs and paying life expenses if you become disabled.
You may owe taxes on the money that you cash in from an IRA. In the case of a traditional IRA, you'll have to pay taxes on the full amount. Roth IRAs were funded with after-tax dollars, so you don't need to pay taxes on the principal amount, but you do need to pay taxes any gains you've earned. The tax rate depends on your total income, including the IRA cash out.
There's a chance that you've already lost money in your IRA. Once you place the money in an IRA account, the funds are typically invest into stocks or mutual funds. It's possible that some of the stocks or mutual funds have lost value since you've opened the IRA. Over the long-term, there's a good chance those investments will rebound. However, if you cash out before they have a chance to, you won't be able to recover any loss in value.
The IRA is meant to be a long-term investment strategy that uses the principle of compound interest. The results of your investments may fluctuate over time, but in general you hope to see a rise over the long term. It's impossible to determine the exact rate that your money will grow, but if you withdraw the money when you're 35, you'll miss several years' worth of potential growth to those accounts. For example, if you had continued to invest just $100 per month into your IRA and it experienced a modest growth rate of 5 percent, you would have had more than $83,000 in your account when you reached age 65.
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