Now that we've covered what an IRA is, and how it differs from some other retirement accounts, we can take a closer look at the question of making withdrawals.
The ability to withdraw from an account is often a significant concern for younger savers.
While it is important to squirrel away money for retirement, it's quite possible that a 25-year-old will face circumstances before age 59 and a half that will require tapping into savings.
It's important to balance savings accounts with long-term investments that are difficult to touch and accessible accounts that have liquid funds for emergencies. So where does an IRA fall in that continuum?
Simply put, you can technically take money out of an IRA at any time. The catch is that, depending on when and how you do so, there may be penalties attached.
Withdrawing for Cash
Once you reach age 59 and a half, you can withdraw from your IRA without penalty. Of course, you will pay tax on the withdrawal.
If you take out a withdrawal before you reach retirement age, you may face a 10% penalty. Keep in mind that money withdrawn from a traditional IRA will count toward your gross income during tax season.
Depending on how much money you withdraw, this could put you into a different tax bracket for that year. The expense of being in a higher tax bracket can quickly add up, especially in addition to the 10% penalty.
There are a few exceptions where you can withdraw money from an IRA before retirement without paying the 10% penalty.
These exceptions are usually related to specific life events.
For instance, if you are purchasing your first home, have become disabled, or are facing medical expenses that add up to more than 10% of your income, you can withdraw up to $10,000 penalty-free.
You can also withdraw for some education expenses or to pay for health insurance if you've been unemployed for at least 12 weeks.
Even with penalty exceptions, however, the money you withdraw from an IRA will be taxed as income. If you are at the upper end of your tax bracket, withdrawing $10,000 might be enough to bump you into the next one.
While rolling over money from an IRA is not the same as withdrawing, it is, technically, a way to remove money from an IRA account without a penalty.
If you have a traditional IRA, you can roll it over in one of three ways: into another IRA, into a Roth IRA account, or into a 401k. This can be a good way to consolidate accounts or to move to a different advisor.