Reader Question: Withdrawals from My IRA?

Many people are so concerned about their finances right now that they are considering raiding their retirement accounts. Indeed, with the stock market down and concerns mounting about being able to cover expenses through this recession, I have been getting questions similar to this one:

Can I take an early withdrawal from my IRA?

Really, though, the question is: Should you take an early withdrawal?

In most cases, it is best to let your retirement account alone. This is because withdrawal means that taxable portions of your retirement account result in taxes at the regular rate (contributions made with after-tax dollars, however, are not taxed). On top of that, you must pay a 10% penalty. Not to mention the fact that once you cash out of your investments, that’s when the loss is assessed. Additionally, you won’t have that principal sitting there any more, earning a return.

However, if you do need money, there are some exemptions to the penalty for early withdrawal from your IRA (which do not apply to a 401k):

• Using the money for qualified education expenses.
• Disability.
• Job loss (money to be used for health insurance).
• 7.5% of your gross income is taken up by unreimbursed medical bills.
• You can take out up to $10,000 to buy a first time home.

Your best bet is to first exhaust other resources before tapping into your IRA early. This is why it is so important to have an emergency fund. Before putting your financial future at risk, do what you can to cover your expenses with money you already have. Early withdrawal from a retirement fund should be your last resort.

You can learn more about IRAs at the IRS Web site.

Image source: Mr. Ducke via Flickr