While you’re working, you may be contributing to an individual retirement account (IRA), which can provide a tax-advantaged way to save for your future. So, is it ever a good idea to tap into …
While you’re working, you may be contributing to an individual retirement account (IRA), which can provide a tax-advantaged way to save for your future. So, is it ever a good idea to tap into your IRA before you retire?
Ideally, you should leave this account intact until your retirement. After all, you could spend two or more decades in retirement, so you’ll need a lot of financial resources. Still, life is unpredictable, so there may be times you’ll consider taking money from your IRA. You’ll need to be aware, though, that if you withdraw funds before you turn 59½, you will generally trigger a 10% penalty. Plus, you’ll be taxed on whatever you take out, thereby losing, at least in part, the benefits of tax-deferred earnings offered by a traditional IRA. (With a Roth IRA, you can withdraw your contributions free of taxes and penalties, but the earnings may be taxed and penalized if you take them out before you’re 59½.)
If you need to withdraw funds from your IRA before you’re 59½, you may be able to avoid the 10% early withdrawal penalty if you meet an exception, such as one of these:
These aren’t the only exceptions to the 10% withdrawal penalty, but they do cover many of the common reasons that people may consider an early withdrawal from their IRAs. And if you do need to take an early withdrawal, consult with your tax advisor to determine your eligibility for avoiding the 10% penalty.
Keep in mind, though, that you do have ways to potentially reduce the necessity of withdrawing from your IRA early. One proven technique is to build an emergency fund containing at least three to six months’ worth of living expenses, with the money kept in a liquid account. You might also consider opening a line of credit. A financial professional can help you explore other options, as well.
Ultimately, if you can leave your IRA intact until you retire, you’ll be helping yourself greatly. But if you do need to tap into your account early, at least be familiar with the possible drawbacks – and how you might avoid them.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC
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