Is It OK to Tap an IRA in a Financial Pinch?

Question: I've read that people can tap their Roth IRA contributions free of penalty at any time and for any reason. But I'm 51 and have a traditional IRA, not a Roth. Is the rule the same?

Answer: The short answer is no. As you noted, the Internal Revenue Service allows tax- and penalty-free withdrawals of Roth IRA contributions at any time, whether you're 59 1/2 or 29 1/2. That's because that money is yours free and clear--you've already paid taxes on it. Nor will you have to take mandatory withdrawals in retirement from a Roth IRA. That flexibility is one of the key reasons I prefer Roth IRAs to traditional.

But the rules on traditional IRA withdrawals are more stringent, so if you need emergency cash, you'll want to exhaust other options before you raid yours prematurely. Not only will you pay taxes on your money, as is the case with any withdrawal from a traditional IRA, but you'll also owe a 10% penalty if your withdrawal doesn't meet certain conditions. (Note that the IRS docks you on late distributions, too: If you fail to take a required minimum distribution from a traditional IRA after you turn age 70 1/2, you'll owe the IRS 50% of the amount you should have taken but didn't. So be sure to stay on your toes with RMDs, ideally by automating them through the financial-service provider where you hold your IRA.)

IRS Publication 590 is your friend when it comes to deciphering the dos and don'ts of traditional and Roth IRAs. Although you'll owe taxes on any premature traditional IRA withdrawal, the IRS will waive the 10% early-withdrawal penalty from a traditional IRA in the following situations:

Health/Disability-Related Reasons
Your withdrawals won't be subject to the 10% penalty if a doctor certifies that you're unable to work as the result of a disability. Nor will you owe a penalty if your unreimbursed medical expenses in a given year total than 7.5% of your adjusted gross income in a given year.

If you're unemployed and not yet 59 1/2, you can also tap a traditional IRA penalty free to pay health-insurance premiums for you, your spouse, or your dependents. To be able to skirt the penalty, you must have received unemployment compensation for at least 12 weeks and you made your IRA withdrawal in the year in which you were unemployed or the one after that.

College Funding
You can also avoid the 10% early withdrawal penalty if you're using the money to pay for qualified higher-education expenses--defined by the IRS as tuition, room and board, fees, books, and supplies--for yourself, your spouse, your children, or your grandchildren. To be exempt from the penalty, the student must be enrolled on at least a half-time basis in a degreed program.

First-Time Home Purchases
IRA owners who aren't yet 59 1/2 can tap up to $10,000 of their traditional IRA assets to fund a first-time home purchase. Note that the home needn't literally be your first home. You just can't have owned a home within the past two years, and you must buy or build the home within four months of taking the money out of your account. Once you've taken $10,000 out of an IRA for a home purchase, you're done--that $10,000 is a lifetime limit.

72[t] Distributions
Individuals can also avoid the early-withdrawal penalty if they're taking what are called substantially equal periodic payments--so-called 72[t] distributions. Using one of three calculation methods (see IRS Publication 590 for details on them), you take distributions from your traditional IRA during the greater of five years or until you reach age 59 1/2. For example, if you start taking distributions at age 57, you must continue until you are age 62 (five years is greater than reaching age 59 1/2).

Death of IRA Owner
Finally, in the "small consolation department," it's worth noting that if an IRA owner passes away before he or she is 59 1/2, that person's estate won't be liable for the 10% early-distribution penalty.

A Note About Early Distributions From Roth Accounts
As I mentioned earlier in this article, Roth IRA contributions are deductible at any time and for any reason. But if you need to withdraw the investment-earnings component of your Roth IRA before you're 59 1/2, you'll owe the 10% penalty and possibly taxes unless your situation falls into one of the exceptions outlined above. Those whose Roth IRAs meet the so-called five-year waiting period will owe only a penalty on a premature withdrawal of investment earnings, while those whose Roth IRAs do not meet the five-year waiting period will owe a penalty plus taxes on any investment earnings that they withdraw before age 59 1/2.  

See More Articles by Christine Benz

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