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Cashing out an IRA before age 60 can provide a lump sum of money, but may result in tax penalties and early withdrawal fees. It can be advantageous for certain expenses, but it’s important to consider the reduction in funds and waiting period.
In times of financial need, some people are tempted to withdraw individual retirement accounts, also known as IRAs. Generally, an IRA is meant to be held until age 60, but can be legally liquidated in times of financial stress. Cashing out of an IRA can provide access to a lump sum of money, but it can also require a waiting period and result in tax penalties and early withdrawal fees.
Consumers can cash out an IRA early for a variety of reasons, but generally they need a lump sum of cash. They may need this cash to buy a house, pay educational expenses, or cover large medical bills. In fact, it may be possible to avoid tax penalties in some cases by using IRA funds for these purposes.
Another advantage of cashing in an IRA before age 60 is that a portion of the entire retirement fund can be retained for later use. A person can withdraw a portion of the IRA funds and then accumulate this income by contributing to this plan over time. That means the funds that remain in the IRA will continue to accumulate earnings as long as the invested funds earn a return during economic upswings.
A common disadvantage of drawing an IRA before the approved distribution age of 59 ½ is that the funds will be subject to a 10% initial tax by the government. This distribution is considered income by the IRS, therefore it must be reported as income and must be taxed. At tax time, this income must be reported again and additional taxes may apply, depending on the filer’s income level. For some taxpayers, the benefits of having access to cash outweigh this tax requirement.
Another disadvantage of drawing an IRA early is that you will be subject to an early withdrawal fee from the plan administrator. Generally, this fee is 15% to 20% of the total distributed fund limit. This can mean that a cash distribution of $10,000 US Dollars (USD) will be reduced by as much as $1,500 to $2,000 USD by the time the money reaches the participant. Therefore, it is important to decide if this reduction is worth it before cashing in all or part of the IRA. There may be other ways to raise capital instead of cashing out an IRA.
One possible refusal to cash an IRA is the waiting period set by the retirement plan administrator. When you need money in a hurry, it’s inconvenient to wait the ten to 14 days required by many plan administrators. This waiting period ensures that all funds are credited to the person, and that employment and identity are verified before the IRA disbursement check is cut.
Smart Asset.
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