The US government provides incentive for individuals to save for retirement by providing tax advantages when you invest in IRAs. However, the IRS strongly discourages withdrawal of IRA funds prior to retirement by providing tax penalties if you take the money out too soon.
Normally, withdrawals from an IRA (either a Traditional or Roth) are allowed without penalty once you reach 59-1/2. Also, Traditional IRA holders must start taking distributions of minimum amounts by April 1 of the year after they reach 70-1/2. Because of the tax nature of the Roth IRA, you are allowed to withdraw your contributions at any time, but will pay penalties if you withdraw any of the earnings. Penalties vary, depending on the situation.
There are a number of “exceptions” to the above rules where withdrawals will be exempt from penalties, including:
- Withdrawals to cover medical expenses that exceed certain limits or for medical insurance while unemployed.
- Withdrawals after you become disabled
- Amounts distributed to beneficiaries if you die
- Distributions that are an annuity or the form of an annuity
- For certain qualified higher education expenses of children or grandchildren
- Distributions to help you purchase, build or rebuild a first home
- Distributions made to the IRS in the case of a levy
The recent economic downturn has led Congress to revise some of the above rules for withdrawals from IRAs. Here is a link to a summary of the revised rules: http://finance.yahoo.com/retirement/article/106391/Congress-Revises-Retirement-Fund-Rules
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