IRA Early Withdrawal

IRA early withdrawals and loaning money from IRA accounts can work either for or against someone, depending on how much is known about the tax structure and what penalties may be assessed by the IRS. Good money stewards ensure that all the facts are in hand before making decisions about their investments. There are several different types of investment vehicles, and each type has different rules to follow. Consider the benefits of each when thinking about withdrawals and loans from this type of investment vehicle. There are several types of investment retirement accounts: Roth, Self-Directed, SIMPLE, and various other employer sponsored investments, all of which can provide great savings venues. However, the IRS can tax on these withdrawals.

With traditional investment retirement accounts, contributions are tax deductible, but there are stringent requirements imposed by the IRS. Once those contributions have been withdrawn, they are treated like any other taxable income. Roth investment retirement accounts are seen as more beneficial than traditional investment retirement accounts, because contributions cannot be deducted out of taxes, and come from income which has already been earned. Roth investment accounts also have the advantage of fewer restrictions from the IRS. Consider carefully the benefits and drawbacks before taking an IRA early withdrawal or proposing loaning money from IRA accounts.

When deciding to make an IRA early withdrawal prior to age 59 1/2, think about the IRS penalties before doing this. Penalties for early withdrawal are usually as much as 10% of the gross amount, and this is in addition to taxes that come out. The extra 10% penalty can be avoided, however, by following IRS rules and guidelines on exceptions. An example of an IRS exception to penalties for early withdrawal or loaning money from an IRA would be if a couple is purchasing a home for the first time. In this case, the IRS will allow withdrawals of up to $10,000 per person. Therefore, this could mean that if the spouse is also a first time home buyer, a couple could realize a $20,000 withdrawal allowance! The requirement of a first time home purchase can apply to transactions longer than two years ago.

Investment retirement account funds may also be used if faced with a large amount of medical expenses. The government requires that unreimbursed medical expenses be greater than 7.5% of the total cost. If disabled, proof must be evident showing that regular employment is not possible. Education bills too can be paid, and this includes room and board, tuition, books etc. Finally, exceptions are extended to an active duty service person in the reserves, if a distribution is taken after mid-August, 2006, and providing the activity is longer than 179 days.

While the IRS exceptions are allowable on IRA early withdrawals before age 59 1/2, give careful thought before doing so and get some advice from a financial planner to ensure all rules and penalties are fully understood. An exception may or may not be available to everyone in all situations. No one wants to be surprised by an IRS notice showing that they owe a large amount of taxes due to an IRA early withdrawal from their investment account, or due to loaning money from IRA accounts, simply because they did not take the time to research the facts. Understand also, that loaning money from IRA accounts is prohibited in many circumstances. Distributions, however, are allowed when participating in a qualified plan such as a 401K. A qualified plan allows loans also, if the borrowed amount is paid back within a certain amount of time. Plan carefully about handling investment retirement account transactions and investments, or the qualified status of the account could be in jeopardy. Only certain individuals are permitted to use funds when loaning money from investment retirement accounts, and if used improperly, could be taxed with the full penalty available under the law. So be sure all dealings are honest.

Businesses will sometimes obtain various types of loans utilizing assets held within an investment retirement account to purchase property, but even then, when loaning money from an IRA, they are subject to very strict rules and guidelines. Certain types of entities such as partnerships, Limited Liability Corporations and trusts can certainly benefit from transactions of this type if structured carefully. Do not dismiss these out of hand. Seek out a qualified tax attorney who specializes in investment retirement account loan transactions of these types to ensure the funds are used correctly. There is no substitute for performing due diligence when setting up business transactions of this type. Assets, both tangible and non-tangible will be protected.

Those who consider themselves to be savvy investors should be careful that investing and loaning money from an IRA does not consume them. The Bible teaches that all should be careful how money is handled or spent, and Jesus warns against serving two masters. "No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. Ye cannot serve God and mammon." (Matthew 6:24) As with all things, whether it is eating, recreation, work, school, or whatever takes up time and attention, it should be done with balance. How money is invested, whether it be via an IRA early withdrawal, or considering loaning money from IRA accounts, should always be done with the utmost attention to pursuing education about the product- in this case withdrawals and loans. In the end, not only are all investments protected, but so are family beneficiaries after loved ones are gone.