An Individual Retirement Account, or IRA, is a good choice when it comes to saving money for retirement. This is actually one of the best options that we could choose if we are planning to have a comfortable and financially secured retirement. Opening an IRA with the best IRA company is really recommended. Thus, we have to research on IRA providers that offer the best IRA rates possible. An IRA is an investment vehicle that can hold several types of investments — this means that we can easily diversify our funds and choose to invest in investment accounts that offer the highest IRA rates of returns at a risk level that we can tolerate.
It is important to know the rules and regulations that govern the IRA, so we can enjoy the most benefits that this investment vehicle could offer. Each type of IRA plan has a different set of IRA rules. It is important for the account holders to know these rules by heart, so they will know how they can maximize the IRA benefits that their chosen IRA plan could provide.
Roth IRA and Traditional IRA
Those individuals who prefer to open a Roth IRA because they want to enjoy tax-free growths for their investments know that taxes are paid right upon contribution. This allows them to enjoy tax-free distributions later on, provided that they abide with the rules. There are two major parameters that Roth account holders need to meet in order for them to be eligible for tax-free withdrawals. According to the Roth IRA rules, the account holders must be at least 59 and 1/2 years of age by the time of the withdrawal, and the account must have been opened for at least 5 years before this may be withdrawn. Any withdrawal before these parameters are met will be considered as early IRA withdrawal, and is subject to penalties.
On the other hand, those people who prefer to open a Traditional IRA must know that the taxes are to be paid upon distribution only. No taxes are to be paid upon contribution. Account holders must be at least 59 and 1/2 years of age before he could make a penalty-free withdrawal from Traditional IRA. Distributions are mandatory when the account holder reaches the age of 70 and 1/2 years at a minimum amount which is calculated based on the life expectancy age of the account owner.
Penalties for Early Withdrawal from IRA
Early withdrawals are subject to penalties. For early withdrawals from Roth IRA, the withdrawal amount will be taxed as a regular income, plus an additional 10% early withdrawal penalty will be charged. This means that Roth IRA owners pay the taxes twice if he withdraws earlier than allowed.
The same goes with Traditional IRA — 10% penalty will be charged to those who made withdrawals before they reach the age of 59 and 1/2 years, and this will be subject to regular income tax. With a traditional IRA, however, taxes are paid once even if account holders withdraw from the account earlier. Exceptions for the penalty for early withdrawal of IRA may be given to those who may qualify for a limited amount of penalty-free early withdrawal.
Because of the steep penalties you face by withdrawing your IRA early, it’s advised to avoid it if possible. Try looking for alternative solutions, such an IRA loans. Just make sure to compare all the fees, penalties, and interest rates to find the best solution for your situation.