How Do You Calculate the Penalty on Cashing Out an IRA?


Quick Answer

Withdrawals from traditional IRAs incur a 10 percent tax penalty if the account holder is under the age of 59 1/2 and does not meet certain exceptions, according to H&R Block. There are no penalties for early withdrawals from Roth IRAs; however, tax benefits are lost.

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Full Answer

Unlike traditional IRA contributions, Roth IRA contributions are made with after-tax dollars, explains H&R Block. As a result, Roth IRAs are not subject to tax penalties. The benefit of Roth IRAs is that payments and distributions are tax-free; however, there are some standards that must be met to qualify for these benefits. The first withdrawal must occur five years after the first contribution. Additionally, one of the following factors must apply: the account holder is over the age of 59 1/2, the payment is being made to a beneficiary after the account holder's death, the payments are made to the account holder after the onset of a disability or the account holder meets the penalty exception for first-time home buyers.

There are also exceptions to the 10 percent early withdrawal penalty on traditional IRAs, notes H&R Block. These exceptions include payment to a beneficiary after the account holder's death, severe disability of the account holder or the distribution being used to offset qualified medical bills or medical insurance payments.

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