In general, the amounts that a person withdraws from an IRA or retirement plan before turning 59 and a half years old are called early or premature distributions. Individuals must pay an additional 10% early withdrawal tax, unless an exception applies. Any withdrawal made from an IRA before age 59 and a half is considered an early withdrawal and usually a 10% penalty plus income tax is applied on the amount withdrawn. Its distribution may be exempt from penalties if it is part of a series of substantially equal periodic payments (SEPP).
SEPP distributions must be made annually and for five years or until you turn 59 and a half years old, whichever comes later. If distributions change, the 10% penalty tax, plus interest, applies retroactively to all previous distributions. If you make withdrawals in your IRA before age 59 and a half, you may have to pay a 10% penalty in addition to income tax. Below, you'll find exceptions that may allow you to make a withdrawal without penalty.
There are some exceptions due to financial hardship to the penalties for withdrawing money from a traditional IRA or from the investment earnings portion of a Roth IRA before turning 59 and a half years old. You can also get rid of the tax penalty if you make a deposit in an IRA and change your mind before that year's extended tax return due date. That way, you'll never have to touch the money or risk paying taxes for accidental early distribution, says Kristi Sullivan, certified financial planner with Sullivan Financial Planning LLC in Denver, Colorado. While the SEP IRA aims to provide financial security during retirement, it has the added advantage of the flexibility to make withdrawals at any time and for any reason, although an early withdrawal penalty may apply.
Since the SEP's IRA distribution rules allow account holders to withdraw funds at any time, staff members have the added advantage of greater flexibility in the event of a financial emergency. But before going into details, you should know that the Internal Revenue Service (IRS) refers to a withdrawal from an IRA as a distribution. Investors and their personal tax advisors are responsible for the manner in which account transactions are reported to the IRS or any other tax authority. Once a person turns 59 and a half years old, they can start withdrawing money, both contributions and profits from an IRA without penalty, if they so choose.
The amount you'll pay in taxes when you withdraw money from an individual retirement account (IRA) depends on the type of IRA, your age, and even the purpose of the withdrawal. To take advantage of this tax-free withdrawal, the money must have been deposited in the IRA and held for at least five years and must be at least 59 and a half years old. When an account holder makes an early withdrawal, that amount is added to their taxable income on Form 1040 for that tax year. You won't owe any income tax as long as you leave your money in a traditional IRA until you reach another key age milestone.
If the account holder needs to withdraw funds from their IRA SEP account before their 59th birthday and a half, these withdrawals are subject to an additional 10% tax penalty for early distribution, in addition to being counted as taxable income. The other time you risk receiving a tax penalty for withdrawing money early is when you transfer money from one IRA to another qualified IRA.