One benefit of contributing to an individual retirement account is personal ownership of the funds. Since you own all of the assets in your IRA, you can get to them any time you need and as often as you like. But just because you can take money from your IRA whenever you want, that doesn't mean you should. There may be fees, penalties and income tax consequences to consider any time you withdraw funds from your IRA.
The Internal Revenue Service requires all individual retirement accounts to be held by a custodian or a trustee, which could be your bank, investments brokerage firm, insurance company, mutual fund or other financial organization. But while a custodian might hold your account, you own the assets in the account.
The IRS doesn't restrict your access to the money in your IRA. As far as the IRS is concerned, you can take money out of your IRA whenever you wish, as frequently as you wish and for any reason at all -- as long as you are willing to pay the piper. If you withdraw funds from your traditional IRA before your withdrawals become qualified, typically at age 59 1/2, you'll owe ordinary income taxes plus an additional 10 percent tax penalty. Rules for Roth IRAs are a bit different. Since you've already paid taxes on your Roth IRA contributions, you can withdraw those funds at any time, without paying taxes or penalties. If, however, you withdraw the earnings portion of your Roth IRA before your withdrawals become qualified, you'll owe income taxes and a tax penalty.
The IRS doesn't care how often you take money out of your IRA, as long as you pay your taxes. Your account custodian or trustee is a different matter. Your access to the money in your IRA might be limited based on the terms of your custodial agreement. Your account custodian might also charge a withdrawal fee or activity fee each time you take money out of your account. It pays to consider the total cost of tapping your IRA, including taxes and fees, before you make that withdrawal. You might find that other sources of funds are a better option.
Other than life insurance and collectibles, the IRS puts few restrictions on the types of investments you can buy with your IRA funds. If you put your IRA money into an investment with limited liquidity, you might not have ready access to your money, or you might have to pay a significant penalty to get those funds. For example, you can put a real estate investment into your IRA, but you might not be able to sell that property quickly if you need to withdraw funds. If you put your IRA money into a bank certificate of deposit, you might incur a penalty for breaking the CD if you take money out early.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.