Taxes and Penalties for Withdrawing an IRA

by Jane Meggitt

The purpose of individual retirement accounts (IRAs) is to save money for the post-employment years, and the Internal Revenue Service (IRS) imposes taxes and penalties on IRA account holders making early withdrawals. Depending on the reason for the early withdrawal, taxes may be imposed, but not the standard 10 percent tax penalty on the amount withdrawn.

Traditional IRAs

Contributors to both traditional and Roth IRAs cannot make withdrawals without penalty until reaching the age of 59 1/2. If you have a traditional IRA, you must begin taking withdrawals by the age of 70 1/2, and cannot contribute to a traditional IRA past that age even if still earning income. Because traditional IRA contributions are made with pretax funds, withdrawals are tax-deferred, not tax-exempt. The IRS taxes distributions from traditional IRAs as ordinary income. Most people are in a lower tax bracket once retired than during the working years.

Roth IRAs

Roth IRA contributions are made with after-tax dollars, and withdrawals are tax-free as long as the account has been in existence a minimum of five years. Unlike traditional IRAs, there is no mandatory age for withdrawing funds, and if you earn income past the age of 70 1/2 you may continue to contribute to a Roth IRA.

Early Withdrawal Tax and Penalties

Early withdrawals on traditional or Roth IRAs are subject to ordinary income tax on the distribution and an additional 10 percent tax penalty. However, taxpayers can make tax-free withdrawals of a particular year's contributions if done before that year's due date for filing of the federal tax return. If meeting this deadline, the additional 10 percent tax does not apply.

Penalty Exceptions

While the IRS still levies ordinary income tax on certain early withdrawals, it does not charge the additional 10 percent tax penalty. These exceptions include account holders who become totally and completely disabled. Withdrawals used for purchase of a first home, payment of medical expenses exceeding 7.5 percent of the adjusted gross income, or for higher education expenses for yourself, your spouse or children are also exempt from the penalty. If inheriting an IRA from a deceased IRA owner, you are not subject to the penalty.