When money is tight, the funds you have accumulated in an IRA can be very tempting. However, the Internal Revenue Service normally imposes some stiff penalties for cashing in all or part of an IRA prematurely. There are some exceptions that allow you to take money out for specific reasons with no penalty.
IRA Distribution Basics
In the normal course of events, you wait until you are at least 59 1/2 years old before distributing (withdrawing) money from an IRA. If it is a Roth IRA, the account must also be at least five calendar years old. Once you've met these conditions, you can cash in an IRA without penalty. You do have to pay ordinary income taxes on distributions from a traditional IRA. Qualified distributions from Roth IRAs are exempt from income taxes.
When you cash in an IRA early, you normally pay a penalty tax equal to 10 percent of the amount withdrawn. The penalty does not apply to contributions to a Roth IRA, which may be withdrawn at any time. If you have made nondeductible contributions to a traditional IRA, these funds can also be taken out at any time without penalty. In both cases, the IRS does not penalize the withdrawals because you did not get a tax deduction for contributing the money in the first place.
For the most part, exceptions to the penalty tax are the same for traditional and Roth IRAs. You may cash in an IRA early without penalty if you are permanently disabled. You can use funds without penalty to pay large medical expenses or for health insurance premiums if you are unemployed. You can use funds penalty free for the purchase or repair of a first home or for higher education costs. You can take money out to pay an IRS tax levy. Finally, you can set up substantially equal annual payments from your IRA. In this situation, the payments must be over a period of at least five years or until you reach 59 1/2, whichever is longer. If you inherit an IRA you can withdraw the money without penalty unless you are the spouse of the deceased and treat the IRA as your own.
Roth IRA Rules
Roth earnings may be withdrawn penalty-free for any of the above reasons. However, an early withdrawal of earnings from a Roth IRA is not considered a qualified distribution in most cases. That means the withdrawn earnings will be taxed as ordinary income, although it would have been tax free if taken out after you reached age 59 1/2. There are two exceptions. Provided the Roth IRA is at least five calendar years old, an early distribution up to $10,000 may be made to pay for the purchase or repair of a first home. If you become completely and permanently disabled, you can cash in Roth IRA earnings tax free and penalty free, again provided the five-year rule is satisfied.