early withdrawal from IRA?

Question

I just cannot seem to get ahead of the game and am swimming in debt. I took out a loan which helped with some and even tried debt consoildation but couldn't afford the monthly payment. I'm thinking of withdrawing money from my IRA (not sure if some or all at this point) to pay off some debt). Is this a good idea? What are the reasons for early withdrawl without penalty?

Answer 1

If you are under 59 1/2 you would pay a penalty of 10% on the early withdrawal of the money from you IRA, and that 10% penalty would be on top of the regular tax you would be paying. There are exceptions to the 10% penalty and here they are:

Exceptions to the Early Distribution Tax Penalties
You do not have to pay the additional 10% tax penalty on your early retirement distribution if you certain exceptions.

Exceptions for Early Distributions from an IRA:

You had a "direct rollover" to your new retirement account,
You received a lump-sum payment but rolled over the money to a qualified retirement account within 60 days,
You were permanently or totally disabled,
You were unemployed and paid for health insurance premiums,
You paid for college expenses for yourself or a dependent,
You bought a house*,
You paid for medical expenses exceeding 7.5% of your adjusted gross income**, or
The IRS levied your retirement account to pay off tax debts.

Exceptions for Early Distributions from a Qualified Retirement Plan such as a 401(k) or 403(b) plan:

Distributions upon the death or disability of the plan participant.
You were age 55 or over and you retired or left your job.
You received the distribution as part of "substantially equal payments" over your lifetime.
You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
The distributions were required by a divorce decree or separation agreement ("qualified domestic relations court order"),

* The home-buying exception has the following additional criteria: you did not own a home in the previous two-years, and only $10,0000 of the retirement distribution qualifies to avoid the tax penalty.


** You do not need to itemize in order to claim the medical expense exception.


If the exception is properly coded in box 7 of your 1099-R form, you do not need to fill out Form 5329. If an exception applies and is not recorded in box 7, then you need to fill out Form 5329.

Answer 2

Bad idea. You will have to pay a 10% penalty for early withdrawal -- unless you are 59-1/2 years old. If it's a regular IRA, you will have to pay income tax on it and combined with your regular income, could just push you into higher tax bracket.

Taking out loans and debt consolidation are not working because you must control your spending first.

Make a strict budget. Eliminate all the extras -- cell phone, eating out, new clothes, premium cable and internet, etc. Take every penny you can squeeze out of that budget and put it on your highest interest rate debt, while paying minimum on the rest. When the highest rate is paid off, move to the next till they are all paid off.

It will take 2 or 3 years but you'll be building a good credit history.

Answer 3

Withdrawals before the age of 59½ is "Early withdrawal." There is no penalty on early withdrawals except for medical or educational or buying home first time and other special situation.
In short you will have to pay 10% extra tax.

Answer 4

I had to cancel an IRA before it's maturity date. I had to pay a penalty. I did not take part of it, I took all of it. Either way, you will have to pay a penalty. They vary from bank to bank. I did not have to come up with a particular reason. I just had to pay the penalty.