10% Early Withdrawal Tax

One of the major benefits of investing in a retirement account is the tax savings offered by the IRS. Check out the blog post “Retirement Account Tax Savings” for more info on the tax savings. The IRS offers these tax savings to incentivize people to plan for their retirement years when they’re no longer able to work, or work as many hours as they did previously. But just as the IRS incentivizes you to invest in your retirement account, it discourages you from withdrawing money from your retirement account before you meet the age of 59½ by charging you a 10% early withdrawal penalty tax (this tax is in addition to the income taxes you may owe on your withdrawals).

The early withdrawal rules depend on the type of retirement account you have. There are two types of retirement accounts offered by our affiliate, Crecer: Traditional and Roth. You can see a breakdown of each type of account on Crecer's Individual Plans page. Here we summarize the early withdrawal rules for each account type.

Traditional IRA

• Any withdrawal made before the age of 59½ (unless the withdrawal qualifies for an exception, see below) is considered an early withdrawal and will include a 10% tax on top of the income tax you may owe on the withdrawal

Roth IRA

• Your original contributions are not subject to an early withdrawal tax. For example, if you contributed $1,000 to your Roth IRA and 1 year later your balance was $1,100, you can withdraw the original $1,000 you deposited without tax, but not the $100 of investment earnings.

• Any earnings withdrawn before the age of 59½ (unless the withdrawal qualifies for an exception, see below) are considered early withdrawals and will include a 10% tax. So in the example above, you would have to pay a 10% tax on the $100 in investment gains.

• An extra note on withdrawals from your Roth IRA - if you’re over 59½ and your account has been open for less than 5 years, your withdrawal will not include the 10% early withdrawal tax (because you’re over 59½), but any investment earnings in your withdrawal will be subject to income tax. However, if you’re older than 59½ and your Roth account has been open for more than 5 years, your withdrawals will be entirely tax free.

Exceptions

Luckily, there are a few exceptions that the IRS allows to avoid the early withdrawal tax. We’ve listed a few of the most common exceptions below. To see the full list of exceptions and the specific details on how to qualify for the exceptions we noted check out the official IRS website. Note that Crecer Connect does not offer tax advice so you’ll have to check with a certified accountant to confirm if you qualify for one of the exceptions.

• First-time home purchase (up to $10,000 lifetime)

• Higher education expenses

• Disability or death

• Unreimbursed medical expenses

• Birth/adoption expenses (up to $5,000)

• Health insurance premiums while unemployed

• Qualified Disaster Recovery Distributions (for federally declared major disasters)

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