Can You Cash Out an IRA Without Tax Impact?

You can use a penalty-free IRA distribution to buy a first home.
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The typical purpose of an individual retirement arrangement (IRA) is to have money in that account when you retire. To encourage people to leave their IRAs alone, the IRS imposes a penalty when the money is withdrawn before the age of 59 1/2. There are exceptions to the rule, though. In some cases, if you need the money, you can cash out or withdraw from an IRA without paying taxes.

Allowable Distributions

You can skip the 10 percent penalty if the IRS considers this cash out a qualified distribution. It does, however, consider the cause. For example, you can take up to $10,000 if you're buying a first home. Other qualified distributions include medical expenses more than 7.5 percent of your adjusted gross income, higher education expenses, and medical insurance if you're unemployed. You can also cash out an IRA penalty-free if you become disabled.

Traditional IRA Taxes

If you claimed a tax deduction when you contributed to a traditional IRA, you'll have to pay taxes on any cash outs. You'll owe income tax on the original deducted contribution, plus on any earnings you withdraw, regardless of the reason. But, if any contributions to your traditional IRA weren't deductible, you won't have to worry about paying income tax on it again. If you've made non-deductible contributions to a traditional IRA, you should have a record of those contributions on form 8606.

Roth IRA Contributions

If you've got a Roth IRA, you can take out the money penalty-free at any time. You don't have to pay income tax on the amount you withdraw, whether you are 59 1/2 years of age or not. Once you take the money out, you can do almost anything you want with it, aside from putting it back in the IRA. A new contribution counts against your contribution limit for the year.

Roth IRA Earnings

You need to have had the IRA for at least five years before you can withdraw the earnings tax-free. You can also use those earnings tax-free if you become disabled. But, the taxman will come calling if you're using the cash-out to pay for college or medical expenses.

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