Can I take money out of my Individual Retirement Account (IRA) while working?

By Amy Fontinelle AAA
A:

Yes, you can take money out of your IRA plan if you’re still working, but you may not want to for three main reasons.

The first is the possible tax penalties. If you take money out of a traditional IRA before age 59.5, you’ll usually pay a 10% federal tax penalty (and possible state tax penalties as well) on the amount withdrawn. Early withdrawals without penalty are allowed in the following situations:

  • Up to $10,000 for a “first time” home purchase (meaning you haven’t owned a home in the last two years),
  • For qualified education expenses (tuition, fees, room and board, textbooks and other required expenses for yourself, your kids, your spouse or your grandkids at any school that has been approved under the federal student aid program)
  • To make ends meet if you become disabled
  • To pay for unreimbursed medical expenses exceeding 7.5% of your adjusted gross income
  • To pay for health insurance premiums while you’re unemployed for 12 weeks or more

If you have a Roth IRA, you can take out your contributions at any time without penalty since you’ve already paid tax on the contributions. However, you cannot remove earnings without penalty until age 59.5 unless you become disabled or make a qualified first-time home purchase. There is also a five-year aging requirement, meaning that if you want to withdraw earnings tax free and penalty free for one of these two approved early withdrawal purposes, your Roth account must be at least five years old.

The second is taxes. You’ll pay taxes on the amount withdrawn from a traditional IRA regardless of your age because your contributions were pretax. Your tax rate while you’re working might be higher than your tax rate in retirement, so it can cost you more in taxes to take a traditional IRA distribution while you’re still working.

The third is the harm you might cause to your long-term financial plan. Any money you withdraw early is not only money you won’t have later; you’re also sacrificing the years of compound returns you could have earned on that money.

Finally, you can start taking early distributions from your IRA without penalty if you take substantially equal periodic payments, meaning you take the distributions on a regular schedule in amounts based on your life expectancy.

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