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The penalty for early withdrawal of an IRA (before age 59.5) is 10%. The amount withdrawn is also taxed at ordinary income tax rates. There are several exceptions to the 10% penalty.
A one in lifetime purchase of a house, new homeowner, $10,000 is exempt from the 10% penalty.
Distributions used to pay medical expenses that are greater than 7.5% of gross income are not subject to the 10% penalty.
Distributions to pay for health insurance to unemployed individuals are not subject to the 10% penalty.
Distributions used to pay for qualified higher education expenses for taxpayer, spouse, child or grandchild are not subject to the 10% penalty.
Distributions made due to death, or total and permanent disability are not subject to the 10% penalty.
The penalty is figured on Form 5329.
Also note that a person can take a withdrawal from an IRA, and they have 60 days to replace the money into an IRA to avoid the IRA as being taxable.
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what if I want to cash it all out to pay off my home? No payback.
Then it would be subject to a 10% penalty, plus taxed at ordinary income, both federal tax and State tax.
I have 325,000 in ira's do you think it is a good decision? I hate my job, but my pay is 104,000. I can't ethically work for them any longer, but don't think I can find another sales job that will pay nearly as much. I want to pay down my house thinking I won't be able to find as good a paying job, but will have a clearer conscience.
Tax wise, rough estimate, taxes would be ugly. Penalty = 32,500, Federal = 84,705, CA = 22521 / Total = $139,726. This is at married rates and not factoring in any other income. Other alternatives.
The IRS does allow one to take early withdrawals if taken over life expectancy. the withdrawals must be for a min of 5 years or until age 59.5, whichever is longer. Must do the withdrawals the whole time period otherwise all distributions are subject to the 10% penalty.
Based on your age, there are various methods to choose from on figuring a withdrawal amount. they vary from $9,000 per year to $15,000 per year. These are based on only your age. Question is, is taking withdrawals over time at say $15,000 per year a workable option with a new job? the taxes would be much lower taking it over time.
Another option would be to spread out the withdrawals over a period of years, say 2, 3, or 5 years. taking it all in one year, a year in which you work full time, it going to cost over over 43% in taxes.