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before age 59.5, you’ll usually pay a 10% federal tax penalty (and possible state tax penalties as well) on the amount withdrawn.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 You’ll pay taxes on the amount withdrawn from a traditional IRA regardless of your age because your contributions were pretax.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.

RELATED FAQS

  1. How do I set up a 408(k) plan in my business?

    Understand the necessary steps for setting up a 408(k) retirement plan, and get an overview of the SEP and SIMPLE plan options ...
  2. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ...
  3. How does a qualified retirement plan early distribution work?

    Weigh the pros and cons of taking an early distribution from a retirement account. Most early distributions are subject to ...
  4. What are the Roth 401(k) withdrawal rules?

    Understand the requirements for tax-free withdrawal from a Roth 401(k) account, how early withdrawals are taxed and options ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Variable Annuitization

    An annuity option in which the amount of income payments received ...
  3. Working Tax Credit (WTC)

    A tax credit offered to low-income individuals working in the ...
  4. Gold IRA

    Definition of Gold IRA
  5. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  6. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
comments powered by Disqus
Related Articles
  1. Top 10 Biggest Retirement Savings Mistakes
    Retirement

    Top 10 Biggest Retirement Savings Mistakes

  2. Why Small Retirement Savings Count
    Retirement

    Why Small Retirement Savings Count

  3. Outliving Your Retirement Savings
    Retirement

    Outliving Your Retirement Savings

  4. Retirement Saving Through The Ages
    Budgeting

    Retirement Saving Through The Ages

  5. 401(k) Debit Cards: Taking A Swipe At ...
    Options & Futures

    401(k) Debit Cards: Taking A Swipe At ...

Trading Center