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Hardship Distributions from an IRA

Hardship Distributions from an IRA

If you haven’t reached retirement age and need quick cash, it may be tempting to take money out of your IRA. However, there are some consequences to consider that could result in tax problems later on.

Know Your Taxes

Distributions from a traditional IRA are generally taxable. So, your marginal rate will apply to these withdrawals.

Roth IRAs consist of income that has already been taxed, so these distributions aren’t taxed in most cases. Withdrawals from either type of IRA that are made before reaching age 59 1/2 can also result in an additional 10% tax penalty.

When you add up your marginal rate, the 10% early withdrawal penalty, and any state income taxes, it can take a big chunk out of your withdrawal. You’ll also miss out on the tax-deferred growth in your IRA, which could cause a sizable reduction in your retirement nest-egg.

For example, if you’re in the 22% tax bracket and take an early distribution of $30,000, you’ll end up paying $9,600 in taxes on that withdrawal. State taxes could increase that amount. 

Weigh your other options for borrowing the money against this tax liability. If the early withdrawal is your only option, at least be prepared for the big tax hit that’s coming.

Early Withdrawals Without Penalty

Some types of early withdrawals are excepted from the 10% penalty. You’ll still need to pay taxes on these withdrawals.

You can avoid the additional tax penalty if you meet any of the following exceptions:

  • You are totally and permanently disabled.
  • The withdrawal is for qualified higher education expenses.
  • Qualified first-time homebuyer withdrawals up to $10,000.
  • Distributions to pay certain unreimbursed medical expenses.

Other exceptions also exist, such as when the withdrawal is the result of an IRS retirement account levy. If you have a 401(k) plan in addition to your IRA, be aware that there are some exceptions that apply to 401(k) plans but not IRAs, and vice versa. 

For example, employees who are separated from service after age 55 (age 50 for public safety employees) avoid the early withdrawal penalty if they have a 401(k), but this exception doesn’t apply to IRA distributions.

Contact The Gartzman Law Firm to speak with an Atlanta tax attorney about your case. Request your consultation by calling (770) 939-7710.