Redeeming an IRA before age 59½ means paying an initial 10% tax.
In times of financial need, some people are tempted to withdraw from individual retirement accounts, also known as IRAs. In general, an IRA must be held until age 60, but can be legally withdrawn in times of financial stress. Redeeming an IRA can provide access to a lump sum of cash, but it can also require a waiting period and lead to tax penalties and early withdrawal fees.
In general, an IRA must be held until age 60.
Consumers can withdraw an IRA early for a variety of reasons, but they generally need an amount of cash. They may need that money to buy a house, pay for education expenses, or cover large medical bills. In fact, it may be possible to avoid tax penalties in some cases by using funds from an IRA for these purposes.
Another advantage of withdrawing an IRA before age 60 is that a portion of the entire retirement fund can be retained for later use. A person can withdraw a portion of the IRA funds and then recover that income by contributing to this plan over time. This means that the funds that remain in the IRA will continue to earn earnings as long as the invested funds earn a return during economic booms.
An IRA can be legally withdrawn during periods of financial stress.
A common pitfall of cashing out our IRA before the approved distribution age of 59 ½ is that the funds will be subject to an initial 10% government tax. This distribution is considered income by the IRS, so it must be reported as income and must be taxed. At tax time, this income must be re-reported and additional taxes may apply depending on the income level of the filer. For some taxpayers, the benefits of having access to cash outweigh this tax requirement.
Another drawback to withdrawing an IRA early is that you will be subject to an early withdrawal fee from the plan administrator. Generally, this fee is 15% to 20% of the total limit of the distributed fund. This could mean that a cash distribution of $10,000 United States Dollars (USD) will be reduced by between $1,500 and $2,000 when the money reaches the participant. Therefore, it is important to decide if this reduction is worth it before withdrawing all or part of the IRA. There may be other ways to raise capital instead of cashing in an IRA.
One potential drawback to cashing in an IRA is the waiting period set by the retirement plan administrator. When money is urgently needed, waiting the 10-14 days required by many plan administrators is inconvenient. This waiting period ensures that all funds are credited to the individual and that employment and identity are verified before the IRA disbursement check is cut.