Can I Close a Traditional IRA and avoid penalties?

Question

I purchased my first home in November 06, and put money down as well as paid closing costs. I've since been unemployed and now, two months later, do not have savings left, since they went toward the house. Can I close my IRA, which is only a few thousand dollars, and use it for current expenses, since that was what I would have done with the money we had saved if we hadn't just bought the house?

Answer 1

Base on description, any withdrawals you make from the IRA to pay for expenses will incur a 10% tax except if it used to pay for medical insurance while you are unemployed. I would highly recommend that you don't close your Traditional IRA, unless you want to retire broke and live in a nursing home. If you close it now, you will have to start all over again to start saving for retirement. You will lose all the compound interest your IRA can make.

Answer 2

You will have to pay tax on the withdrawal, as you would have done in any case if you wait until retirement.

The big issue is the 10% penalty. See the link below for exceptions to the penalty. I think, sadly, that you do not qualify as you have already bought the house. Are you paying for your own medical insurance now? That may be a way to withdraw without penalty.

Answer 3

If your contribution accrued earnings while in the Roth IRA and you also withdraw the earnings, the earnings will be subjected to income tax. Furthermore, if you are under age 59.5, the withdrawal will be subject to an early-distribution penalty as well, unless you meet an exception to the penalty. Both the tax and the penalty apply because your distribution is not a qualified distribution.

Try transferring the blanace to a mutual fund then withrawing for a less heavy hit.

Answer 4

It depends what your tax bracket is. If you can deduct the entire amount of a regular IRA from your income while working and your income bracket is substantially higher than it will be when retired, then you are better off with a regular IRA. But if you are making over the limit to deduct a regular IRA then a Roth would be better.