Yes, you can take money out of your individual retirement account (IRA) if you’re still working. However, you may not want to—for three main reasons.
- Early withdrawals from an IRA generally trigger a 10% penalty from the IRS.
- All withdrawals from an IRA are taxable income, and if you take an early one, you will probably be in a higher tax bracket than you will be in during retirement.
- Money you remove from an IRA is money that will no longer earn you compound interest during your pre-retirement years.
The first is the possible tax penalties imposed by the Internal Revenue Service (IRS). If you take money out of a traditional IRA before age 59½, you’ll usually pay a 10% federal tax penalty and may also possibly face state tax penalties.
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)
- If you become permanently and totally 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 take substantially equal periodic payments, meaning you take the distributions on a regular schedule in amounts based on your life expectancy
If you have a Roth IRA, you can take out your contributions at any time without penalty, as you’ve already paid tax on the contributions. However, you cannot remove any earnings without penalty until age 59½, unless you become disabled or make a qualified first-time home purchase (for which you can only withdraw up to $10,000). 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 You’ll pay taxes on the amount withdrawn from a traditional IRA regardless of your age, because your contributions were pretax. This is in addition to the 10% penalty on the withdrawal. 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.
Harm to Your Long-Term Financial Plan
The third is the harm you might cause to your long-term financial plan. Any money you withdraw early is not just money you won’t have later; it’s also money on which you will not earn the years of compound returns you could have racked up. The loss can end up being quite substantial.
Alina Parizianu, CFP®, MBA
MMBB Financial Services, Great Neck, NY
The fact that you are working doesn’t impact your eligibility to take a distribution, but there may be certain taxes and penalties. For a traditional IRA, you have to pay income tax on the withdrawal. If you are under age 59½, you will also pay a 10% penalty, subject to some exceptions. If the account is a Roth IRA, the distribution is made after five years from the first contribution, and the owner is 59½ years old, the distribution is tax and penalty free. If, however, one of the above conditions is not met, distributions are subject to the following:
- Contributions: always tax and penalty free.
- Conversions: tax free but subject to 10% penalty if less than five years.
- Earnings: taxes and 10% penalty apply.
Distributions must be taken in the following order: contributions, conversions, and earnings.