Know IRA Penalties before Investing

by: WilliamBrightworth
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Making a mistake investing with your IRA can have serious penalties. If you pull money out of your traditional IRA, you need to pay taxes due on the new income, which could potentially move you up a tax bracket. You also will owe ten percent of the withdrawal amount as penalty payment to the IRS. This can add up quickly, seriously damaging your nest egg!

In a Roth IRA, penalties are similar, but because you've already paid tax on your contributions, you won't owe income tax on the principal. It is possible that you will owe income tax on some of the money that has accumulated, and you will also have to pay that 10% surcharge.

IRA penalties will always be assessed if you withdraw early from your IRA, but you may find yourself paying penalties in other situations. For example, you may have been managing your IRA yourself and invested in something the IRS considers a conflict of interest. For instance, if you put your investment in an office building you also occupy, the IRS may determine this qualifies as an early disbursement.

If you overcontribute to your IRA, you may also find yourself in a pickle. IRA penalties for overcontributing include paying late taxes due (in the case of traditional IRAs), fines, and sometimes other expenses. You should carefully avoid either overcontributing or undercontributing to your IRA.

This doesn't mean you can't touch your IRA. In a few cases, you can withdraw money from your IRA penalties-free, but you must understand what you're doing and how the different rules apply to your IRA. It's easier to use a Roth IRA in this way, but even a traditional IRA can be a source of cash in certain situations.

You may withdraw money from your IRA without incurring a penalty if you are purchasing a home for the first time in two years. You and your spouse are also eligible to withdraw up to $10,000 for yourself if you are using the cash for your own home, or that of your grandchildren, parents or child. The limit on this withdrawal is 10 thousand for your lifetime. You may also withdraw cash to use on certain qualified educational expenses.

Your IRA can also be used to pay for medical insurance once you've been unemployed for 12 consecutive weeks, or to fund certain medical expenses if they exceed 7.5% of your gross income. If you become disabled, you can treat your IRA as if you've already retired. If you are a qualified reservist called to active duty, you may be able to avoid the 10% fee (talk to your command about this - the rules are changing to accommodate people as they get called up). And in a couple of other situations - when your life expectancy is shortened, for instance - you may be able to have your IRA qualified for regular disbursement early.

Regardless of penalization, there is no case where you should withdraw money from your IRA without good reason. IRA penalties are there to protect your retirement investment and encourage you against relying on your retirement as a rainy day fund. Protect your IRA and it will take care of you in the future, helping you live a comfortable and secure life later on!

About the Author

William Brightworth is a consultant who writes about Ira investing in Real Estate. Follow this link to learn more about Ira real estate investing.  

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