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Ask winktax Your Own Question
winktax
winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience:  18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
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what are the tax penalties for cashing out an ira early?

Customer Question

what are the tax penalties for cashing out an ira early?
Submitted: 5 years ago.
Category: Tax
Expert:  winktax replied 5 years ago.

winktax :

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 The amount withdrawn is also taxed at ordinary income tax rates.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.

winktax :

A one in lifetime purchase of a house, new homeowner, $10,000 is exempt from the 10% penalty.

winktax :

Distributions used to pay medical expenses that are greater than 7.5% of gross income are not subject to the 10% penalty.

winktax :

Distributions to pay for health insurance to unemployed individuals are not subject to the 10% penalty.

winktax :

Distributions used to pay for qualified higher education expenses for taxpayer, spouse, child or grandchild are not subject to the 10% penalty.

winktax :

Distributions made due to death, or total and permanent disability are not subject to the 10% penalty.

winktax :

The penalty is figured on Form 5329.

winktax :

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.

winktax :

I hope the above answers your question. If not please provide additional information or clarifying question so that I can provide a more specific answer. Otherwise please click the accept button and Thank You.

JACUSTOMER-8s0qowkt- :

what if I want to cash it all out to pay off my home? No payback.

winktax :

Then it would be subject to a 10% penalty, plus taxed at ordinary income, both federal tax and State tax.

JACUSTOMER-8s0qowkt- :

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.

winktax :

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.

winktax :

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.

winktax :

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.

winktax :

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.