Can You Withdraw Money From an IRA Into a Savings Account?
Image: Bigstock
Taking money out of your individual retirement account (IRA) and putting it into a savings account is possible, but it comes at a cost. An IRA is designed to help you save for retirement while enjoying tax advantages. When you pull money out early or move it somewhere that is not a qualified retirement plan, you may face taxes, penalties and a big hit to your long-term savings.
How IRA Works
An IRA is a retirement savings account that you open and manage yourself, unlike a 401(k), which is run by an employer. The money you put in grows through investments, and you get certain tax breaks depending on the type of IRA you have.
A traditional IRA allows you to contribute pre-tax income, which lowers your taxable income for the year. But when you withdraw that money in retirement, it is taxed as ordinary income. A Roth IRA works the opposite way. You pay taxes upfront, but your withdrawals in retirement are tax-free.
So, while you can take money out of either account before retirement, the timing and type of IRA determine how much you will owe in taxes and penalties.
What Happens When You Withdraw Early
With a traditional IRA, any withdrawal before age 59 and a half is considered early. That means the IRS will treat it as income for the year and charge a 10% early withdrawal penalty over and above the regular taxes. The penalty can be avoided in a few cases, such as paying for higher education, buying your first home or covering large medical expenses. But these exceptions are limited and often come with detailed IRS rules.
For Roth IRAs, withdrawals work a little differently. You can take out your original contributions anytime, tax-free, because you have already paid taxes on that money. But if you dip into your earnings before age 59 and a half or before the account has been open for at least five years, you will likely owe taxes and a 10% penalty.
Transfers, Rollovers & 60-Day Rule
Not every move of IRA money triggers taxes. If you are transferring your IRA from one provider to another — say, from your bank to an online brokerage — that is called an IRA transfer, and it does not result in a tax bill.
There is also something called a rollover, which allows you to move money from one retirement plan to another, like from a 401(k) to an IRA. As long as the money goes directly from one account to another or is redeposited into another qualified account within 60 days, you will not owe taxes or penalties.
But if you withdraw the funds and do not put them back into a retirement account within those 60 days, the IRS will treat it as a taxable withdrawal.
Hidden Costs: Losing on Future Growth
Beyond taxes and penalties, another cost people often overlook is lost growth. Money in your IRA grows over time through compounding, meaning you earn returns on both your original investment and the gains you have already made.
When you withdraw early, not only do you lose a portion of your savings to taxes, but you also miss out on years (or even decades) of compound growth. That can leave a noticeable gap in your retirement funds later.
Alternatives to Draining Your IRA
If you need cash quickly, there are often better ways to get it than withdrawing from your IRA. You may dip into a regular savings account, tap a home equity line of credit or look into short-term personal loans.
In some cases, you can also use a 72(t) distribution plan to take early withdrawals from your IRA without penalties, though it locks you into taking equal payments for several years. This option should only be used under careful financial guidance.
Bottom Line
While you are free to move IRA money into a savings account, doing so before retirement can be an expensive decision. You may end up paying income taxes, an early withdrawal penalty and missing out on years of compound growth.
If you are considering making a withdrawal, it is best to speak with a qualified financial or tax advisor first. When it comes to IRAs, patience pays off. The longer you leave your money invested, the more time it has to grow, and the less likely you are to face avoidable penalties down the road.