Non-Qualified IRA Withdrawal Penalties

by Emily Weller

Withdrawing money from any type of individual retirement account (IRA) before you are 59 1/2, or for a non-exempt reason, can cost you a fair amount of money. In addition to any taxes you'll owe, you will also lose any earnings that money would have gained had you left it in the IRA until you retire.

Distributions Defined

A non-qualified distribution is usually a withdrawal from an IRA made before you reach the age of 59 1/2. If you have a Roth IRA and take distributions from it before the account has been open for five years, you will also have to pay taxes, even if you are 59 1/2 when you make the withdrawals. A qualified distribution is one you take after you reach retirement age, or if you become disabled before age 59 1/2. If you pass away, your beneficiary can withdraw from the account without penalty.

Penalty Tax

The penalty tax on non-qualified withdrawals from an IRA is 10 percent of the amount you withdrew. For example, if you take $1,000 from a traditional IRA before you are age 59 1/2, you will have to pay 10 percent of the $1,000, or $100. You will also owe income tax on the $1,000 because it was from a traditional IRA. The income tax rate depends on your current tax bracket.

Income Tax

Non-qualified withdrawals of Roth IRA earnings require you to pay income tax on the amount of earnings you take out. For example, assume you contributed $2,500 to a Roth IRA three years ago, and since then the IRA has increased in value by $500. If you decide to withdraw the entire amount from your IRA, you will owe income tax at your current rate on the $500, plus the 10 percent penalty tax if you withdrew the money before retirement age.

Avoiding Penalties

Avoid penalties by not making non-qualified withdrawals from your IRA. There are instances when are allowed to take money from the account before age 59 1/2 without paying the 10 percent penalty. Depending on if you have a Roth or traditional IRA, you may still need to pay income tax on the amount you withdraw. For example, if you use money from an IRA to pay for medical expenses that are greater than 7.5 percent of your income, you will not have to pay the penalty. Other exceptions include withdrawing money to pay for school, your first house or if you return the money to the account or a new IRA within 60 days.

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