According to the Internal Revenue Service (IRS), account holders can cash individual retirement accounts (IRAs) early, though a penalty may apply. The amount withdrawn is considered an "early distribution" if the account holder hasn't reached the correct retirement age. There are exceptions to this rule that allow account holders to avoid paying the IRS penalty.

Cashing Out a Traditional IRA

Cashing out a traditional IRA is treated as regular income, according to Investopedia.com. That means if you're age 59½ or younger, in addition to any taxes due on the money, you'll be liable for a 10 percent early withdrawal penalty, unless you qualify for an exception. Account holders can withdraw funds by contacting the financial institution that manages the IRA. They will provide forms to complete (make sure to have photo identification when making the withdrawal). The financial institution will issue a check and withhold the 10 percent penalty automatically.

Cashing Out an IRA for School

According to BankRate.com, the IRS doesn't assess a tax when withdrawing funds for educational costs for yourself, children or grandchildren. However, the student must attend a school that is IRS-approved. Most colleges, universities and vocational programs that meet the IRS requirements for the federal student aid program are eligible. Withdrawals can be made for educational costs, such as room and board, books and tuition.

IRA Funds to Purchase a Home

IRA funds up to $10,000 can be used toward the purchase of a first home, according to BankRate.com. These funds can be used toward the purchase price, closing costs and other financing fees. IRA funds can be also be used to help a child, grandchild or parent with the purchase of their first home. However, IRA funds for a home purchase must be used within 120 days of withdrawal or you'll be liable for taxes.

Hardship Expenses

Account holders may also be exempt from early withdrawal taxes when experiencing hardship. Examples of hardship include paying for medical insurance while unemployed, permanent disability and excessive medical expenses.

Source:

Bank Rate: IRS Rules for Early IRA Withdrawals

Investopedia: What are the Penalties for Withdrawing from My Traditional IRA

IRS: Traditional IRA