Some reasons people make early withdrawals from their IRAs include disability, death of the IRA owner, medical expenses, purchase of a first home, costs of higher education, active military duty, payment of health insurance premiums during unemployment and payment of back taxes to the IRS. The IRS excuses the early distribution tax penalty for these withdrawals. Other reasons include a falling stock market, the payment of debt and early retirement.Continue Reading
Normally, if investors make early withdrawals from an IRA before they are 59.5 years old, they must pay federal income tax and a 10 percent penalty tax on the withdrawal. However, the IRA allows a number of exceptions. If the owner of the IRA becomes permanently disabled, money can be withdrawn without penalty. If the owner of the IRA dies, the estate is allowed to withdraw the funds without penalty. Medical expenses are exempted from penalty only if they comprise a significant portion of adjusted gross income. Higher education costs include those for the IRA owner, spouse, children and grandchildren.
Although people often withdraw funds from IRA accounts for debt payment, playing the stock market and the need for quick cash, the value of these withdrawals is offset by the heavy tax penalties incurred. Those retiring early who want to avoid the 10 percent early withdrawal penalty can arrange with the IRS to set up substantially equal periodic payments, or SEPP. These are annual withdrawals of equal predetermined amounts for a set number of years. If the terms of the determination are not met precisely, the IRS takes the 10 percent penalty tax retroactively on all the disbursed income.Learn more about Financial Planning