Q:

What are the tax penalties of early withdrawal of IRA funds?

A:

Quick Answer

Besides the regular income tax levied on funds withdrawn from IRA accounts, early withdrawals are subject to a 10 percent penalty tax, reports the IRS. A number of circumstances qualify as exceptions to the 10 percent penalty.

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Full Answer

Although account holders can withdraw and use IRA funds at any time, the early distribution tax applies to any withdrawals made before the age of 59 1/2, according to the IRS. Exceptions are made when the funds are used for higher education for the account holder or the account holder's family, the purchase of a first home, medical insurance while the account holder is unemployed or excessive medical bills, as reported by Bankrate. Account holders who become completely and permanently disabled are eligible for penalty-free early withdrawals. Reserve military personnel who are called to active duty for 180 days or more can take penalty-free IRA withdrawals.

Another method of avoiding penalties when tapping assets from IRA accounts early is by taking substantially equal periodic payments, states Kiplinger. The payments must continue for at least five years or until the account holder reaches 59 1/2, whichever is longer. However, once the payments are initiated, they must continue for as long as the terms are set up, and the account holder can take no other withdrawals without risking substantial penalties.

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