Penalities for an Early IRA Pension Withdrawal

An IRA pension, also known as an individual retirement account, is a savings and investment vehicle people can establish to save for the future. This type of pension offers a number of tax benefits but can also come with penalties if early withdrawals occur.

Types Of IRA Pensions

There are four different types of IRA pension plans. They are:

  • Traditional–This is an IRA pension that is opened by an individual. It enjoys tax-deductible status on contributions, up to a certain dollar amount each year. The earnings in this type of account remain tax-free until withdrawal. At this point, income and capital gains taxes may be charged, but they are generally lower if a person has reached retirement age and has seen a decline in income.
  • Roth–This type of pension is also established by an individual. Contributions are not tax deductible. Certain withdrawals from this type of account are, however, tax-free.
  • SEP IRAs–This retirement pension vehicle is established by an employer.
  • SIMPLE IRAs–This vehicle is also established by an employer.

Tax Penalties of an Early IRA Pension Withdrawal

Since an IRA pension is designed to help people save and prepare for retirement, there are penalties attached to early withdrawals. When money is distributed from an account before a pension holder turns 59 ½, a 10 percent penalty is charged to the amount taken out. The account holder may also face the need to pay taxes on the distribution.

 Avoiding Penalties from Early Withdrawals

While most early distributions from an IRA pension result in taxes and withdrawal penalties, there are some exceptions to the rules. The IRS will relax its guidelines under these circumstances:

  • Educational expenses–Early withdrawals from an IRA pension account do not face the 10 percent penalty if the money is used to pay for books, tuition, fees and supplies for educational pursuits. The money must be spent on an IRS-approved college, vocational school, university or post-secondary school. Money withdrawn must be used by the individual, a spouse or the account holder’s children or grandchildren. It may also be possible to use the distribution to pay for living expenses in some cases.
  • Home buying–First-time home buyers may also withdraw from their IRA pensions to help make their purchase. The IRS allows individuals to use up to $10,000 without penalty. If both partners in a marriage are first-time buyers, each person can pull up to $10,000 toward the purchase.
  • Medical expenses–The IRS also allows penalty-free withdrawals for the payment of excessive medical expenses that are not reimbursable. Unemployed people may withdraw funds to pay insurance premiums as well. If a person becomes totally disabled, distributions may be allowable before age 59 ½.
  • Death–If the account holder dies, the money in an IRA pension account may be transferred to a beneficiary without penalty. Other tax requirements, however, may apply in this situation.

IRA pension accounts are designed to help people save for retirement. With this in mind, the IRS does discourage early withdrawals with penalties. Avoiding penalties is feasible in certain circumstances.

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