Individual Retirement Accounts are investment opportunities backed by some of the most complicated rules present in the United States. The best thing to do before working on building your IRA or making the choice to cash out your investment is to consult with a financial expert to ensure that you do not end up paying more taxes then absolutely required.
There are two types of IRAs investors can choose from. There are Roth IRAs where the money being invested has already been taxed and traditional IRAs where the invested money is not pre-taxed. Both types of IRAs feature different tax rules. But typically both based the required minimum distribution amount by calculating the value of your account in conjunction with your life expectancy.
The withdrawal penalties from IRAs are typically generated by federal laws and usually apply when a withdrawal from an IRA is made. Since the money for Roth IRAs are taxed prior to investment, the tax penalties apply to traditional IRA withdrawals. If there is a withdrawal from a traditional IRA prior to age 59, the money must be included in the total income tax for that year.
With traditional IRA contributions, when you choose to make automatic deposits into your retirement fund, the money is taken out of your annual salary and deferred into an IRA. The benefit is, there will be more money invested to generate a higher interest rate. For example if you earn 50k annually and contribute 5k to your IRA, you will only pay income tax on 45K. However, if you withdraw the money prematurely, the converse is true as well. If you earn 50k and withdraw 5k from your IRA prematurely, you will pay income tax on 55k the year of the withdrawal.
In general, the laws applying to IRA tax penalties are 10% if the person is 59 years of age. Those penalties may be waived if the IRA money is accessed for educational expenses for yourself or dependents, down payments for qualified first time home buyers, medical expenses, upon death or are legally declared mentally unfit or disabled.