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Withdrawing money from an IRA comes with certain prerequisites, the non-compliance of which may lead to a penalty. If you dip into your IRA before the age of 59½, the IRS usually hits you with a 10% early withdrawal penalty, plus regular income taxes on the amount withdrawn. However, before you panic or make a hasty decision, know that there are ways to access your retirement savings early without getting penalized. It all depends on the type of IRA you have and the reason for your withdrawal.

Whether you hold a Traditional or Roth IRA, each has different rules on taxes and penalties. Knowing the difference and the exceptions could save you thousands of dollars.

Traditional IRA: Taxed Now, Penalized if Early

A Traditional IRA is funded with pre-tax dollars, meaning you pay taxes when you take the money out, not when you contribute. That’s why early withdrawals are such a tax burden —they’re treated as income, and if you’re under 59½, you also owe an additional 10% penalty.

Let’s say you withdraw your full balance before the eligible age. You’ll owe income tax on the entire amount at your current tax rate and then 10% more for taking it out early.

However, there are a few exceptions to that 10% penalty. The IRS allows certain penalty-free early withdrawals, like up to $10,000 for a first-time home purchase or to cover medical insurance premiums after losing a job. But unless your situation falls into one of these specific categories, the penalty stays.

Roth IRA: More Flexible but With Conditions

Roth IRAs offer more breathing room. Since you pay taxes upfront on your contributions, you can withdraw that contribution amount at any time, for any reason, without taxes or penalties. That’s a big deal.

However, there’s a catch when it comes to withdrawing the earnings, meaning the money your investments make over time. To take those out tax and penalty-free, you must follow the “five-year rule” and meet at least one qualifying condition: you’re above 59½, permanently disabled, using the funds for a first-time home purchase (up to $10,000), or you’re the beneficiary of a deceased account holder.

If you do not adhere to the above qualifying conditions, then you will be imposed with a penalty. For example, if you contributed $20,000 and the account grew to $30,000, the extra $10,000 in earnings would face both income tax and a 10% penalty if taken early and without a qualifying exception.

Rolling Over Your IRA? Time Matters

If you’re simply moving money from one retirement account to another, you can do so without triggering taxes or penalties, but the timing is crucial. You need to complete the rollover within 60 days of receiving the distribution. If you miss that deadline, the IRS could treat it like an early withdrawal, and penalties apply.

In some cases, if you miss the window due to circumstances beyond your control, you may be able to apply for an extension, subject to fulfilling certain conditions.

What if You Inherit an IRA?

If someone passes away and leaves you their IRA, you can access the funds penalty-free regardless of your age. The reasoning is simple: this is no longer your retirement account — it’s inherited money. While the 10% early withdrawal penalty doesn’t apply, you may still owe income tax depending on the account type and your relationship to the deceased.

For Roth IRAs, in particular, inherited account rules can get tricky. If the original account owner hadn’t met the five-year requirement before passing away, any distributions of earnings, even years later, could still be taxed, though not penalized.

Bottom Line

Early withdrawals from an IRA are costly but not always unavoidable. Understanding the tax rules for Traditional versus Roth IRAs, keeping track of your contribution and earnings amounts and knowing the specific exceptions can make a major difference. If you’re facing a financial crunch and thinking about pulling from your IRA early, make sure you know which part of your savings you’re touching and what it’ll cost you.