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Premature Withdrawals

There are a number of rules limiting the withdrawal and use of your IRA assets. Violation of the rules generally results in taxation of the withdrawn amount as ordinary income plus a penalty equal to 10 percent of the withdrawal. The rules apply equally to SEP-IRAs and IRAs established under SIMPLE plans, except that the penalty for a withdrawal from a SIMPLE plan within the first two years of participation is 25 percent. Also, there are more lenient rules for Roth IRAs.

Generally, you violate the rules if you withdraw assets from your regular IRA before you reach the age of 59-1/2. However, there are a number of exceptions to these rules for cases that might be considered hardship withdrawals. If you can use any of these exceptions, you won't have to pay the penalty, but you will still be taxed at ordinary rates on the amount of the withdrawal. Also, you must complete IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and give the reason that the distribution is escaping from the penalty.

Exceptions. There are several exceptions to the age 59-1/2 rule that can save you from having to pay the penalty. (You will still owe the income tax.) You can avoid the penalty in the following circumstances:

If none of these exceptions apply, you may still may be able to avoid the penalty. If you make a contribution to an IRA (perhaps mistakenly), you take no deduction for it, and you withdraw your contribution and pay interest before the due date (including extensions) of your income tax return for that year, the withdrawal is not a taxable distribution. However, any interest or income on the amounts are treated as taxable income in the year the contribution was made. The income must be reported on Form 5329.


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