- The IRS attempts to encourage long-term savings in IRA accounts by imposing a penalty on withdrawals taken too far before traditional retirement age. In an IRA you must wait until you are at least 59 1/2 years old to avoid this penalty, which amounts to 10 percent of the amount you withdraw. The penalty comes in the form of an additional tax on your Form 1040. You can avoid this early withdrawal penalty through certain IRS-approved exceptions, such as if you become disabled, if you have excess medical expenses, or if you use the money for higher education costs.
- Although you cannot generally take penalty-free distributions from your IRA before age 59 1/2, you must take a distribution once you reach age 70 1/2. Known as a Required Minimum Distribution, or RMD, this amount must be calculated every year (based on IRS figures) and withdrawn by December 31. If you do not take your distribution, you owe a penalty of 50 percent of the amount not withdrawn.
- In addition to any penalties you may owe, almost all IRA distributions are subject to income taxation. For example, if you take an IRA withdrawal at the age of 50 to pay some household bills, you would owe both income tax and the 10 percent penalty. The primary exceptions to this rule are any contributions you made to a traditional IRA that were non-deductible at the time of the contribution, or any contributions to a Roth IRA.
- Certain transactions are prohibited in an IRA, and if you perform any of them, you could lose the status of your account as an IRA. One of the prohibited transactions is if you purchase real estate for personal use with IRA funds. If this is your intent, you should not use your IRA funds, but rather funds from a regular taxable account. The penalty for this transaction is that your entire IRA is considered distributed, meaning you will owe income tax on the entire amount in addition to possible penalties such as the early withdrawal penalty.
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