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Article By: WilliamBrightworth
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IRA Penalties and their Implications
With a Roth IRA your penalties are similar, but you've already pre-paid tax on your contributions, so you won't be assessed income tax on the principal. Possibly, you will owe income tax on the interest that has accumulated, and in any case you'll still get hit with the 10% IRS surcharge.
IRA penalties will always be assessed if you withdraw early from your IRA, but you may find yourself paying penalties in other situations. For example, you may have been managing your IRA yourself and invested in something the IRS considers a conflict of interest. For instance, if you put your investment in an office building you also occupy, the IRS may determine this qualifies as an early disbursement.
If you overcontribute to your IRA, you may also find yourself in a pickle. IRA penalties for overcontributing include paying late taxes due (in the case of traditional IRAs), fines, and sometimes other expenses. You should carefully avoid either overcontributing or undercontributing to your IRA.
This doesn't mean you can't touch your IRA. In a few cases, you can withdraw money from your IRA penalties-free, but you must understand what you're doing and how the different rules apply to your IRA. It's easier to use a Roth IRA in this way, but even a traditional IRA can be a source of cash in certain situations.
You may withdraw money from your IRA without incurring a penalty if you are purchasing a home for the first time in two years. You and your spouse are also eligible to withdraw up to $10,000 for yourself if you are using the cash for your own home, or that of your grandchildren, parents or child. The limit on this withdrawal is 10 thousand for your lifetime. You may also withdraw cash to use on certain qualified educational expenses.
In case of unemployment, your IRA may be used to pay for medical insurance, but only if you've been unemployed for 12 consecutive weeks. IRAs may also fund medical expenses if they qualify and exceed 7.5% of your gross income. If you are disabled, you may withdraw from your IRA as if you were already retried. Also, if you are a qualified reservist and called to active duty, you might be able to escape the 10% fee, although you should check with your command about this (rules are changing as we are calling more people up). Finally, in the case where your life expectancy might be dramatically shortened, you may be able to have your IRA disbursed early without penalty.
In no case should you withdraw money from your IRA without good reason, regardless of penalization. IRA penalties are there to protect you and your retirement investment. If you were allowed to withdraw money whenever you want, the constant temptation would likely lead to a lot of IRAs being used as personal piggy banks. Instead, protect your IRA and pull money from it only when it's absolutely necessary and when it will be a major benefit to your life, helping you build toward retirement rather than just helping you out today.
Article Source: ArticleZones.com
About the Author
William Brightworth is a consultant who writes about Ira investing in Real Estate. Follow this link to learn more about Ira real estate investing.
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