3 Best Times and Reasons To Withdraw From Your IRA

IRA account folder
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In a world ruled by financial advisors, tapping your IRA early might come with some sort of built-in warning system.

Maybe danger signs, flashing red lights or some type of alarm. Or perhaps a trapdoor would flip up and someone who looks like the Monopoly Man would climb out and start excitedly advising you to be careful.

He would be correct. You should be careful when considering an early withdrawal. That doesn’t mean you should never do it, though.

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What does “early” mean when it comes to withdrawing from an IRA? It depends on what type of IRA you have. With a traditional IRA, for example, pulling any money out before age 59½ often means a hefty 10% penalty. If you open a SIMPLE IRA and take a distribution within two years, you might face a 25% penalty.

The main reason to avoid withdrawing before retirement though is that IRAs are, well, individual retirement accounts. They’re meant for retirement, and they are ideally unused until then. Dipping in early can be too tempting to resist for some, however.

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“Tapping your IRA before you turn 59½ really should be a last resort,” said Jake Heisler, a certified financial planner with Quaker Wealth Management in Moorestown, New Jersey. “But there are circumstances when it is your last resort.”

“You are literally robbing from your future self in retirement,” said Tania P. Brown, a CFP based in Lawrenceville, Georgia, who is also the director of financial coaching for OfColor. “If you think about it through that lens, it can help.”

Here are three situations where withdrawing from your IRA may make sense.

You’ve hit age 59 1/2

In an ideal world, this is how IRAs are supposed to work. You’ve contributed, your money has grown tax-free, and it’s waiting for you as you begin — or at least approach — retirement. By waiting until 59½, you’ve avoided those early-withdrawal penalties. You have savings to supplement other income during your retirement years.

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Be sure to consider your options beyond IRA withdrawals, though. It may make sense to tap other resources first, Heisler advised. A smart approach may mean less to pay in taxes and more effective stretching of your resources. Heisler emphasizes readiness for the so-called “retirement smile” — the tendency for expenses to be higher early in retirement, then dip, then rise again in late retirement. This calls for a dynamic strategy, Heisler said.

“We see folks taking out IRA assets when they don’t have to,” he said.

Working with a financial professional is usually a good idea. If not a full-on CFP, then perhaps someone associated with your bank or the company through which you have your IRA.

“If you don’t have a financial advisor,” Heisler said, “at least be cognizant of how long this money is going to last.”

You Qualify for a Hardship Exception

You may be able to skip the 10% penalty if you qualify under an IRS exception, designed to help people through hardships. This list includes help with un-reimbursed medical bills, permanent disabilities, higher-education costs, first-time homebuyer costs, calls to active military duty and more.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act also cleared the way for penalty-free, early withdrawals in some circumstances. The SECURE 2.0 Act of 2022, signed by President Biden on Dec. 29 as part of a $1.7 trillion federal spending bill, offers even more flexibility, including penalty-free $1,000 withdrawals for emergencies, CNET reported.

These and other rules around early withdrawals are subject to change. Checking with a financial pro is a good idea if you’re pursuing a penalty exception.

And, cue one of the aforementioned warning signs.

“Just because you can take a penalty exception doesn’t mean you should,” Brown cautioned. “Those are for people who desperately need it.”

Brown also pointed out another common pitfall. Just because you avoid the penalty doesn’t mean you don’t still have taxes to pay on the withdrawal. Others pay the penalty AND don’t realize that a large tax hit is also coming. People who forget this get hit with a surprise double whammy.

You Really Need the Money

And we mean really. See above for all the examples of the penalties you may pay, the potential tax bill and what you would be giving up.

Even factoring in all of that, tapping your IRA early may be your last and best option — particularly in these challenging economic times.

“It’s worth considering if you can’t pay basic needs,” Brown said. “But even then, you should take out just what you need and try to repay it.

“This is your future. People forget that the whole purpose of it is that you don’t have to struggle in retirement. If you use it, that’s what you’re giving up.”

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About the Author

David Herman traces his love for journalism and storytelling back to age 9, when he created his own “front pages” on binder paper to cover the top news and sports stories of the day. He wasn’t much of an athlete and was never the first kid picked for anything, until one of his grade-school teachers divided his class into teams for an essay-writing contest, and Herman was, for once, the first one of the board. It was one of several moments that pointed him toward a writing career. After graduating from Gonzaga University, he wrote for newspapers in Washington and Idaho before moving to the web with MSNBC.com, Olympics.com and MSN.com, eventually serving as managing editor for both the MSN homepage and Microsoft News. Now a content designer at Meta, he’s also the author of “Almost Yankees: The Summer of ’81 and the Greatest Baseball Team You’ve Never Heard Of” – an homage to his first favorite baseball team. He lives in Seattle with his wife, three children and a chocolate lab named Charlie. Dave Herman (@jdavidherman) / Twitter
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