Top Reasons to Cash out Your IRA Early

An Individual Retirement Account, or IRA, enables you to save part of your pre-tax income and gradually build up a nest egg. You can specify which investments your IRA would hold as well as the industry or investment limits it must comply with. Internal Revenue Service stipulations say you cannot withdraw your IRA money before you turn 59 ½. Several life events might prompt you to cash out your IRA, and some of them would make you pay a 10% penalty.

To Outperform the Stock Market

You should withdraw money from your IRA account in periods when the stock market is bowing to economic tedium and share prices are taking a deep dive. You certainly would not want to watch your portfolio shrink by the day, hopelessly sticking to the notion that prices will go back up – because, as my Grandpa used to say, "Whatever goes down always goes back up, and vice versa." It may be wise to cash out your IRA early if, for example, the stock market is plummeting by the day and you see that certificates of deposit, one of the safest investment accounts out there, are posting a healthy return of, say, 4% or 5%.

Top Reasons to Cash out Your IRA Early

To Retire Early

You may decide to leave the workforce earlier than anticipated for a hodgepodge of reasons, some of which could be personal and others resulting from the adverse forces of the economy – think high unemployment, massive layoffs or temporary default of your company. Talk to your financial adviser to learn more about restrictions pertaining to early withdrawals, especially as they apply to your situation. Typically, the Internal Revenue Service allows you - through a program called "Substantially Equal Periodic Payments," or SEPP – to withdraw money from your IRA before age 59 ½ and avoid the 10% penalty normally assessed.

To Get Some (Much Needed) Cash

Times can be tough sometimes, and you might need extra cash to cope with the whims of the economy and the uncertainties of life. If, for example, your house burnt down – let's be more positive, a friend's house burnt down – and you need money to pay the deductible before the insurance company doles out the rest of the coverage money, you might need to cash out your IRA. I don't recommend this option because the penalties you would pay may not make the withdrawal a good choice, but if you absolutely need the money, try alternatives like a loan from the bank or relatives before cashing out your IRA.

To Prevent Personal Default or Bankruptcy

If you are in financial straits and risk losing to bankruptcy everything you have built over the years, I think it makes economic and moral sense to withdrawl from your IRA and pay whatever penalties the IRS would assess. A highly regarded IRA account specialist once told me that personal bankruptcy should always come as a last resort, especially when you agree that early-withdrawal penalties, however substantial they could be, typically pale in comparison with the financial toll bankruptcy brings.

To Pay for College

In an economy in which tuition costs skyrocket by the semester and academic institutions invariably seek to adjust their rates, you might need to cash out your IRA to pay for college, be it for yourself or a loved one. Here again, the analytical approach to follow is to weigh the benefits of a degree with the penalty costs inherent in early withdrawal. Before cashing out your IRA account, talk to your banker and ask him or her about student loan options, the prevailing rates, and terms and conditions for reimbursement. Academic loans often have annual percentage rates that may be lower than the 10% the IRS would charge for early withdrawal.

To Take Advantage of Inheritance Legislation

Inheritance legislation is generous when it comes to penalizing IRA withdrawal that occurs if the account holder passes away. For example, if you suddenly expire in a disastrous car accident, your heirs would not be subject to the 10% penalty, nor would they have to wait for you to turn 59 ½ - which is, to say the least, nonsensical because you are already dead. The IRS says that in this case, the 59 ½ age requirement and other IRA tax provisions do not apply.

To Pay Healthcare Costs

Healthcare costs are another element that might prompt you to terminate your IRA account, whether it is partially or completely. As with all adverse life events, a medical emergency does not give you warning signs. If you don't have a sizable cash reserve or rainy-day fund, you would have to withdraw money from your IRA earlier than the mandated age of 59 ½.

Recap

When discussing IRA cash-out tactics, the key goal is to determine which withdrawal scenarios yield the lowest penalties. Before cashing out of your IRA, determine whether the 10% penalty applies to your situation, and if yes, figure out whether another funding alternative – such as a personal loan – might be preferable to handle the specific situation you are facing.

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